Exchange rate risk exists when there is exposure to fluctuations in currency exchange rates, and it can occur in various forms such as foreign contracts, direct foreign investments, or foreign portfolio investments. It is not eliminated when the contract is written in terms of the domestic currency as changes in exchange rates can still affect the transaction.

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Exchange Rate Risk

Question 107

Multiple Choice

Exchange rate risk

A) exists when the contract is written in terms of the foreign currency.
B) exists also in direct foreign investments and foreign portfolio investments.
C) does not exist if the international trade contract is written in terms of the domestic currency.
D) All of the above.

Correct Answer: