An Australian company that imports goods from a German supplier on credit can protect itself against transaction exposure risk by:

Question

Quizplus · Accepted Answer

Entering into a contract in the forward exchange market can protect the company from potential losses due to changes in currency exchange rates. By locking in a specific exchange rate at a future date, the company can ensure that the cost of the imported goods remains consistent.

Borrowing Australian dollars and investing in the German money market can also provide protection against transaction exposure risk. By earning interest on the borrowed funds, the company can offset any potential losses due to changes in exchange rates. However, this option may also involve some degree of risk, as changes in interest rates and market fluctuations can impact the overall investment return.

Therefore, the best choice would be to consider a combination of both options - entering into a contract in the forward exchange market and borrowing funds to invest in the German money market. This approach can provide a more comprehensive risk management strategy that can help protect the company's financial interests while balancing potential risks and rewards.

An Australian Company That Imports Goods from a German Supplier