What kind of exposure exists for foreign currency firm commitments?
A) Fair value exposure
B) Cash flow exposure
C) Both fair value exposure and cash flow exposure
D) Neither fair value exposure nor cash flow exposure

Question

Quizplus · Accepted Answer

Foreign currency firm commitments are assets and liabilities that are denominated in a foreign currency and represent an obligation to pay or receive a certain amount in the future. As a result, they are exposed to both fair value and cash flow risks. Fair value exposure arises from changes in the foreign exchange rates between the time the firm commitment was made and the time it is settled. Cash flow exposure arises from changes in the foreign exchange rates between the functional currency of the entity and the currency of the firm commitment, which can affect the amount of cash flows required to settle the obligation.

What Kind of Exposure Exists for Foreign Currency Firm Commitments