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ACCA Strategic Professional · Advanced Financial Management · Management of international trade and finance

A UK-based company has signed a contract to import machinery priced in US dollars, payable in 90 days. Which type of foreign exchange exposure does the company face from this contract before payment is made?

The company faces transaction exposure. It has a known dollar payment due in 90 days, so movements in the dollar against sterling change the sterling cost of settling the invoice. Translation and economic exposures concern consolidation and long-term competitiveness, not a single contracted cash flow.

  1. ATransaction exposureCorrect
  2. BTranslation exposure
  3. CEconomic exposure
  4. DPolitical exposure

Explanation

A firm-committed foreign currency cash flow that settles in the future creates transaction exposure, because sterling cost of the dollar payment changes as the rate moves. Translation exposure relates to consolidating foreign subsidiaries, and economic exposure relates to long-term competitive effects. Political exposure is not a currency exposure type.

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