Skip to content

ACCA Applied Skills · Financial Management · The nature and types of risk and approaches to risk management

Kestrel plc, a UK company, sells goods to a US customer and will receive US$500,000 in three months. Kestrel's functional currency is sterling and the invoice is in dollars. Which type of exchange rate risk does this receivable expose Kestrel to?

This is transaction risk. Kestrel has agreed a dollar invoice but will receive cash in three months, so the sterling value of the settlement may change before payment. Translation risk relates to consolidating foreign operations, and economic risk to long-term competitive position.

  1. ATransaction riskCorrect
  2. BTranslation risk
  3. CEconomic risk
  4. DInterest rate risk

Explanation

Transaction risk is the risk that the home-currency value of a foreign-currency cash flow changes between the date the transaction is agreed and the date of settlement. The dollar receivable will be settled in three months, so sterling proceeds may change. Translation risk concerns restating foreign subsidiaries' statements, and economic risk concerns long-term competitiveness.

Did you get it right without looking?

One question tells you little. A timed set on The nature and types of risk and approaches to risk management shows your real accuracy, how long you take and where you lose marks.

Practise The nature and types of risk and approaches to risk managementFree diagnostic mock

More The nature and types of risk and approaches to risk management questions