Foreign Exchange Risk Overview

<p>Variations in currency values during import or export transactions. (D)</p> Signup and view all the answers

<p>Translation risk (A)</p> Signup and view all the answers

<p>Only conducting domestic transactions (B)</p> Signup and view all the answers

<p>Diversification through a portfolio of investments. (C)</p> Signup and view all the answers

<p>It can affect competitiveness and long-term survival due to cost changes. (D)</p> Signup and view all the answers

<p>The gearing ratio increases to 1.05:1. (B)</p> Signup and view all the answers

<p>1:1 (C)</p> Signup and view all the answers

<p>Potential default on the loan. (A)</p> Signup and view all the answers

<p>€105m (C)</p> Signup and view all the answers

<p>To address translation rate risk. (B)</p> Signup and view all the answers

<p>Changes in exchange rates before settlement (A)</p> Signup and view all the answers

<p>An Irish company selling golf equipment for payment due in a foreign currency (C)</p> Signup and view all the answers

<p>Using forward contracts for exchange rates (C)</p> Signup and view all the answers

<p>It is easier to quantify within a specific timeframe. (D)</p> Signup and view all the answers

<p>By issuing invoices in their home currency (C)</p> Signup and view all the answers

<p>Transaction risk is easier to identify and measure. (A)</p> Signup and view all the answers

<p>FX Equity Investments (A)</p> Signup and view all the answers

<p>The company incurs a loss from exchange rate fluctuations. (B)</p> Signup and view all the answers

<p>Strengthening of the home currency (B)</p> Signup and view all the answers

<p>Consumer preferences (C)</p> Signup and view all the answers

<p>It is difficult to predict, quantify, and avoid. (C)</p> Signup and view all the answers

<p>Pulling out of uncompetitive markets. (D)</p> Signup and view all the answers

<p>Financing debt to offset major competition. (B)</p> Signup and view all the answers

<p>Seeking government intervention, quotas, and import restrictions. (A)</p> Signup and view all the answers

<p>They cannot be used to hedge economic rate risk. (A)</p> Signup and view all the answers

<p>Invest in flexible manufacturing facilities. (A)</p> Signup and view all the answers

<p>Currency options (A)</p> Signup and view all the answers

<p>Distorted reported performance in consolidated financial statements (B)</p> Signup and view all the answers

<p>Risk of adverse exchange rate movements affecting book values (B)</p> Signup and view all the answers

<p>When the company is approaching its debt limits (A)</p> Signup and view all the answers

<p>Forward contracts (C)</p> Signup and view all the answers

<p>All foreign currency assets and liabilities (C)</p> Signup and view all the answers

<p>It is an accounting adjustment and not a cash-based loss (C)</p> Signup and view all the answers

<p>Long-term borrowings (D)</p> Signup and view all the answers

<p>Mismatch between revenues and expenses (C)</p> Signup and view all the answers

<p>Strong British pound relative to the Yen (B)</p> Signup and view all the answers

<p>Corus (B)</p> Signup and view all the answers

<p>Every 1c movement in favor of the $ affects profit by €1-2m. (A)</p> Signup and view all the answers

<p>Set up production facilities in East Asia (C)</p> Signup and view all the answers

<p>€7m off its earnings for every 1 pence decline (B)</p> Signup and view all the answers

<p>Cut thousands of jobs (B)</p> Signup and view all the answers

<p>Currency risk due to Brexit (B)</p> Signup and view all the answers

The sensitivity of a company's domestic currency values (assets, liabilities, income) to unexpected exchange rate changes.

Risk that exchange rate changes reduce a company's competitiveness in international markets, affecting future cash flows.

Risk that a company's current financial transactions are affected by exchange rate movements.

Risk that exchange rate changes affect the financial statements of a company with foreign operations.

Strategies to control and reduce risks.

A risk management technique reducing/eliminating financial exposure to risk.

Diversifying investments to reduce overall risk.

The degree to which a company's financial position is affected by exchange rate fluctuations.

Risk to a company's competitive position, even without overseas operations, due to currency fluctuations.

Economic rate risk impacting export businesses when their home currency strengthens against the trading currency.

Economic rate risk for a company when its rivals' home currency weakens against the trading currency.

The degree to which a company is affected by economic rate risk, varying by industry, product differentiation, and competition.

Strategy of choosing target markets, considering niches or broader markets, competitiveness, and foreign rivals.

Strategy concerning the products a firm produces, considering innovation, and adapting to market needs.

Strategies for setting prices, like fixed price contracts, frequent changes, or skimming/penetration.

Strategy for managing finances to offset economic rate risks, such as matching revenue and costs in the same currency to manage debt.

In the 1970s, Laker Airlines faced a mismatch between its revenue, primarily in British pounds (STG£), and its expenses and liabilities, which were primarily in US dollars (USD$). The company's purchase of new aircraft in USD$ exacerbated this issue.

When the US dollar strengthened in 1981, Laker Airlines' revenue declined because it was now worth less in pounds. Their liabilities also increased, as they needed more pounds to pay their USD$ debts. This led to the company's bankruptcy.

In the early 2000s, a strong pound caused issues for British companies like Corus, forcing them to cut jobs and require their suppliers to lower prices to remain competitive.

A strong pound led Dyson to move production facilities to East Asia in the early 2000s to take advantage of lower manufacturing costs.

Japanese car manufacturers in the UK faced challenges due to a strong pound. They had to lower their prices to compete but were also bound by contracts to buy raw materials from UK suppliers, making them less competitive compared to imports.

CRH, a building materials company, experiences a decrease in earnings per share (EPS) for every 1 cent movement in the euro. This is because a significant portion of their profits originate from the US, where the dollar is weaker compared to the euro.

Fyffes, a fruit importer, benefits from a weak dollar as it imports bananas priced in USD$, thus increasing their operating profits with each euro gain.

Ryanair is significantly exposed to Brexit due to its operations and revenue generated within the UK. A weaker sterling weakens their earnings, with a 1 pence decline potentially costing them €7 million in profits.

Risk of exchange rate changes between transaction date and settlement date, causing gains or losses on currency conversions.

A way to avoid transaction rate risk by billing customers in the company's own currency.

Methods used by companies to minimize the risk of financial losses due to exchange rate fluctuations.

Techniques within a company to manage transaction rate risk, such as matching foreign currency assets and liabilities.

Techniques using external financial institutions to manage transaction rate risk, such as forward contracts.

An agreement to buy or sell a specific amount of foreign currency at a set price on a future date.

A standardized agreement to buy or sell a specific amount of foreign currency at a predetermined price on a specific future date.

A company's overseas subsidiary may have assets and liabilities valued in a foreign currency. If the foreign currency weakens against the home currency, the company will report a loss on its financial statements.

When a multinational firm translates its foreign subsidiaries' financial statements into the home currency, exchange rate changes can create losses (or gains) on the consolidated financial statements.

Translation rate risk is an accounting loss, not a cash-based loss. It only affects the value reported on the financial statements, not the actual cash flows.

Directors might consider hedging translation rate risk if the company is close to its debt limits. Translation losses could trigger a loan agreement violation and lead to default.

Strategies that companies can use to manage their exposure to foreign exchange rates within their own operations.

Examples include matching receipts and payments in the same currency, leading and lagging payments, adjusting contract prices based on forward rates, and changing the currency of invoicing.

Strategies to manage currency risk that involve using external financial instruments or contracts.

A company's debt compared to its equity, often expressed as a ratio. This ratio measures how much a company relies on borrowing to finance its operations.

A condition or agreement in a loan contract that the borrower must adhere to. These covenants safeguard the lender's interests, often relating to financial performance metrics like the gearing ratio.

Strategies used by companies to minimize the financial impact of foreign exchange rate fluctuations on their balance sheets. It aims to protect the company from potential losses due to currency movements.

Failure to meet the terms of a loan agreement, such as failing to make payments or breaching covenants. This can lead to serious consequences for the borrower, including legal action and asset seizure.