Question 1

If an Australian company has a GBP 1 million receivable,due in three months,and takes out a forward exchange contract to hedge,it enters into a contract to buy GBP 1 million in three months' time.

Accepted Answer

The company should enter into a forward to sell GBP and buy AUD.

Question 2

In relation to foreign exchange risk policy formulation and the policy document,discuss the role of the management structure of an organisation.

Accepted Answer

The answer of In relation to foreign exchange risk policy...

Question 3

Discuss transaction exposure for a firm with only one or two international transactions.

Accepted Answer

The answer of Discuss transaction exposure for a firm with...

Question 4

In calculating net FX exposures a company should collate payables and receivables according to the currency of the transaction rather than the country of the transaction.

Accepted Answer

It is movements of the different currencies that expose a company to FX risk.

Question 5

If a Singaporean-based company has a USD 1 million receivable due on 20 August and a USD 1 million payable on 20 August,the company has a perfect natural hedge.

Accepted Answer

Since the receivables and payables are the same and due at the same time any movement in the currencies would be offset.

Question 6

Discuss the importance of the recording of the expected cash inflows and outflows in estimating transaction exposure.

Accepted Answer

The answer of Discuss the importance of the recording of...

Question 7

When one currency is appreciating in equal but opposite amounts to another currency,the two currencies are said to be perfectly negatively correlated.

Accepted Answer

A correlation coefficient of -1.0 indicates the two currencies are perfectly negatively correlated.

Question 8

A commonly used strategy by Australian exporters for managing FX risk exposure is the practice of invoicing in the home currency.

Accepted Answer

It is not a common practice. Majority of trade transactions are conducted in hard currencies such as USD, the euro or yen.

Question 9

In relation to foreign exchange risk policy formulation and the policy document,discuss the FX objectives of an organisation.

Accepted Answer

The answer of In relation to foreign exchange risk policy...

Question 10

An exposure to a currency with a lower standard deviation against an importer's local currency results in a lower degree of risk than exposure to a currency that has a higher standard deviation.

Accepted Answer

A lower standard deviation means lower volatility of the currency.

Question 11

For a company's treasury FX division it is inappropriate policy to allow an FX dealer to carry out the backroom tasks of confirmations,settlements,and reconciliation.

Accepted Answer

There have been many examples of financial loss when FX dealers have been able to do backroom tasks.

Question 12

The policy document that governs FX management should specify how communication should occur across the organisation structure.Discuss this statement.

Accepted Answer

The answer of The policy document that governs FX management...

Question 13

An Australian importer with a USD payable in three months would be hedging through a money-market hedge if it borrows AUD today,invests the funds in the US money market for three months and then pays the account payable with the maturing money market funds.

Accepted Answer

By using a money market hedge the Australian company knows the AUD cost of its USD account payable.

Quiz 17: Foreign Exchange: Risk Identification and Management