CA Final · Advanced Financial Management · Risk Management
Sundaram Textiles Ltd exports yarn and invoices in US dollars, while its raw cotton is purchased in rupees. A sharp fall in the USD/INR rate reduces the rupee value of its receivables. Under the usual classification of financial risks, this exposure is best described as:
The exposure is currency or exchange rate risk, because the rupee value of dollar receivables falls when the dollar weakens against the rupee. Nothing in the facts suggests the buyer defaults or that interest rates or funding availability are the cause.
- ACurrency (exchange rate) riskCorrect
- BInterest rate risk
- CCredit (counterparty) risk
- DLiquidity risk
Explanation
The loss arises because the rupee value of a dollar receivable changes with the exchange rate. That is currency risk. Credit risk would arise only if the buyer failed to pay, which is not stated here.
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