Vada, Inc. exports computers to Australia, invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to:
A) economic exposure.
B) transaction exposure.
C) translation exposure.
D) economic exposure AND transaction exposure.

Question

Quizplus · Accepted Answer

Economic exposure refers to the risk that a company's cash flow, earnings, or future cash flows will be affected by changes in exchange rates. Since Vada, Inc. is competing with a company in Japan while exporting to Australia and invoicing in U.S. dollars, changes in the exchange rate could affect its competitive position and pricing, leading to economic exposure. Transaction exposure, on the other hand, relates to losses or gains arising from the settlement of existing financial obligations whose terms are stated in a foreign currency. Since the question does not mention any obligations to be settled in foreign currency, transaction exposure is not the primary concern here. Translation exposure involves the impact of currency exchange rate changes on the reported financial statements of a company, which is not indicated as a concern in the scenario provided.

Vada, Inc Exports Computers to Australia, Invoiced in U