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CA Final · Advanced Financial Management · Foreign Exchange Exposure and Risk Management

Which statement about a corporate forex risk management policy is correct?

Natural hedging by matching foreign currency inflows and outflows is a valid policy tool because the exposures offset each other, lowering the amount that must be covered with forwards or options. The other statements misdescribe translation exposure, leading and lagging, and the fixed-rate nature of forwards.

  1. ATransaction exposure arises only from translating foreign subsidiary balance sheets
  2. BNatural hedging through matching foreign currency inflows and outflows reduces the need for derivative coverCorrect
  3. CLeading and lagging is used to eliminate economic exposure entirely
  4. DA forward contract leaves the firm with unlimited upside if the currency moves favourably

Explanation

Matching receivables and payables in the same currency offsets exposure internally, reducing derivative cover needed. Translation, not transaction, exposure relates to consolidating subsidiary statements. Forwards lock the rate and forgo favourable moves.

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