Which of the following statements are correct?
I. The usage of forward rates can help reduce the short-run exposure to exchange rate risk.
II. Accounting translation gains are recorded on the income statement as other income.
III. The long-run exchange rate risk faced by an international ﬁrm can be reduced if the ﬁrm borrows money in the foreign country where it has operations.
IV. Unexpected changes in economic conditions are classiﬁed as short-run exposure to exchange rate risk.

Question

Which of the following statements are correct? 
I. The usage of forward rates can help reduce the short-run exposure to exchange rate risk.
II. Accounting translation gains are recorded on the income statement as other income.
III. The long-run exchange rate risk faced by an international ﬁrm can be reduced if the ﬁrm borrows money in the foreign country where it has operations.
IV. Unexpected changes in economic conditions are classiﬁed as short-run exposure to exchange rate risk.

Quizplus · Accepted Answer

Statement I is correct because using forward rates allows a firm to lock in an exchange rate for a future transaction, thus reducing short-term exposure to exchange rate risk. 
Statement II is incorrect because accounting translation gains are recorded on the income statement under comprehensive income, not other income. 
Statement III is correct because if a firm borrows money from the foreign country where it has operations, it can hedge against long-run exposure to exchange rate risk by matching its assets and liabilities in the same currency. 
Statement IV is incorrect because unexpected changes in economic conditions are classified as long-run exposure to exchange rate risk, not short-run.

Which of the Following Statements Are Correct