Skip to content

ACCA Strategic Professional · Advanced Financial Management · The use of financial derivatives to hedge against forex risk

Borealis Group, based in Country A, has a wholly owned subsidiary in Country B whose net assets are denominated in Country B's currency. The group consolidates in Country A's currency. Which statement about the exposure arising from these net assets is correct?

It is translation exposure. Restating the foreign subsidiary's net assets into the parent's reporting currency changes reported consolidated figures when exchange rates move, but it does not itself involve a cash settlement, so it is not transaction exposure.

  1. AIt is translation exposure, which affects reported consolidated net assets but does not directly create a cash flowCorrect
  2. BIt is transaction exposure, because the subsidiary's assets will be sold in future
  3. CIt is economic exposure, because the exchange rate affects reported equity
  4. DIt is contingent exposure, because the assets depend on a tender outcome

Explanation

Restating the net assets of a foreign subsidiary into the group's presentation currency creates translation (accounting) exposure. Gains or losses arise on consolidation, not from cash settlement of a specific transaction. Hence transaction exposure is wrong, and economic exposure concerns future cash flow value.

Did you get it right without looking?

One question tells you little. A timed set on The use of financial derivatives to hedge against forex risk shows your real accuracy, how long you take and where you lose marks.

Practise The use of financial derivatives to hedge against forex riskFree diagnostic mock

More The use of financial derivatives to hedge against forex risk questions