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ACCA Strategic Professional · Strategic Business Leader · Managing, monitoring and mitigating risk

Dunmore Logistics' finance director states that the company's reported profits fall whenever the euro weakens, because it earns revenue in euros but pays most costs in dollars. Which type of risk is this?

This is foreign exchange risk, a form of market risk. Because revenue is in euros and costs are in dollars, a weaker euro reduces the value of income relative to costs and lowers profit. Interest rate, liquidity and political risks are not described.

  1. AInterest rate risk, from changes in borrowing costs
  2. BForeign exchange (currency) risk, a form of market riskCorrect
  3. CLiquidity risk, from inability to meet short-term debts
  4. DPolitical risk, from government intervention

Explanation

Revenue and costs in different currencies expose profit to exchange rate movements, which is currency risk within market risk. No borrowing cost change, cash shortage or government action is described.

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