Skip to content

FRM Part I · FRM Exam Part I · How Do Firms Manage Financial Risk?

A US-based manufacturer has signed a contract to receive EUR 5 million from a German customer in three months. Which type of foreign exchange exposure does this receivable primarily represent?

This is transaction exposure. The firm has a committed foreign-currency cash flow with a known settlement date, so its dollar value will change as the EUR/USD rate moves. Translation exposure relates to consolidation of subsidiaries, and economic exposure relates to long-run competitiveness and uncommitted future cash flows.

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

Explanation

A contractual cash flow denominated in a foreign currency, with a known date, creates transaction exposure because the home-currency value changes with the exchange rate. Translation exposure concerns consolidation of foreign subsidiary statements, and economic exposure concerns the effect on long-term competitive position and future cash flows.

Did you get it right without looking?

One question tells you little. A timed set on How Do Firms Manage Financial Risk? shows your real accuracy, how long you take and where you lose marks.

Practise How Do Firms Manage Financial Risk?Free diagnostic mock

More How Do Firms Manage Financial Risk? questions