Question 1

In order to have specific policies in relation to FX management which part of the company needs to establish FX policies?
A) Accounting and reporting division
B) Management and audit division
C) The manager of the treasury division
D) The board of directors

Accepted Answer

The board of directors is responsible for establishing FX policies as they oversee the strategic direction and governance of the company, including financial risk management strategies such as those related to foreign exchange (FX).

Question 2

In examining its need to cover its exposures to foreign exchange risk,a company obtains current data on the correlation between various currencies to which it is exposed.The company determines that its main currency exposures are to the USD and the JPY.These currencies have a correlation coefficient of +0.96.Based on the spot rate for each of the currencies,the company expects USD cash inflows equivalent to AUD 500 000,and JPY cash inflows equivalent to AUD 495 000.Which of the following statements is most correct?
A) High positive correlation between USD and JPY (hedge risk exposure)
B) High positive correlation between USD and JPY (little need to hedge risk) exposure
C) High positive correlation between USD and AUD (hedge risk exposure)
D) Low negative correlation between USD and AUD (no need to hedge risk exposure)

Accepted Answer

The high positive correlation coefficient of +0.96 between USD and JPY implies that they generally move in the same direction, which means that there may be little benefit in hedging against their combined exposure. As a result, the company may not need to hedge their risk exposure.

Question 3

In relation to potential FX exposures,historical data suggests to manage FX exposures:
A) all importers, exporters, lenders and borrowers in capital markets tend to use currency futures contracts and cross-currency swaps.
B) in commercial trade transactions importers and exporters use currency futures contracts and in capital market transactions lenders and borrowers use forward exchange contracts.
C) in commercial trade transactions importers and exporters typically use forward exchange contracts and currency options while in capital markets transactions lenders and borrowers tend to use currency futures contracts and cross-currency swaps.
D) All importers and exporters in trade as well as lenders and borrowers in capital market transactions tend to use forward exchange contracts and currency options.

Accepted Answer

Historical data suggests that importers and exporters typically use forward exchange contracts and currency options in commercial trade transactions, while lenders and borrowers tend to use currency futures contracts and cross-currency swaps in capital market transactions. This makes choice C the most accurate option. Choice A is incorrect because it states that all importers, exporters, lenders, and borrowers use currency futures contracts and cross-currency swaps, which isn't entirely true. Choice B is incorrect because it wrongly associates futures contracts with capital market transactions and forward exchange contracts with commercial trade transactions. Choice D is incorrect because it states that all parties involved use forward exchange contracts and currency options, which is not the case.

Question 4

Which of the following about foreign exchange objectives for a large company is incorrect?
A) An FX strategy that requires a company to hedge a defined percentage of its identified FX exposures at all times is called a defensive strategy.
B) A company document should state whether it will have a centralised or decentralised FX operation.
C) A firms' FX function is part of the organisation's treasury division.
D) Strategies that require a company to analyse and forecast movements in FX markets and then apply based on its forecasts are called hedging strategies.

Accepted Answer

Strategies that require a company to analyze and forecast movements in FX markets and then apply based on its forecasts are not called hedging strategies. Hedging strategies involve the use of financial instruments to reduce the impact of currency fluctuations on a company's business operations.

Question 5

When a company has an open FX position,this means:
A) it has a large amount of FX accounts.
B) it has just received a large FX account payable.
C) it has a USD account receivable and a USD account payable.
D) the net value of FX buys and sell transactions is yet to be settled.

Accepted Answer

An open FX position means that the net value of FX buys and sell transactions is yet to be settled. This means that the company has exposure to potential gains or losses due to fluctuations in the exchange rate until the position is closed.

Question 6

According to the text,which person(s)in the company is responsible to ensure that operational procedures concerned with FX management are developed?
A) Manager of accounting and reporting division
B) Manager of management and audit division
C) Manager of treasury division
D) The chief executive

Accepted Answer

The answer of According to the text,which person(s)in the company...

Question 7

When a company analyses and forecasts foreign exchange movements and then applies strategies based on this,this strategy is called:
A) active.
B) defensive.
C) forward.
D) protective.

Accepted Answer

This strategy is called "active" because it involves actively analyzing and forecasting foreign exchange movements to make strategic decisions, as opposed to a more passive or defensive approach that might focus on protecting against potential losses without seeking to benefit from market movements.

Question 8

A US-based company that is exporting car components into Australia is about to complete an export order and expects to receive payment of AUD 500 000 in three months' time.The spot exchange rate is USD/AUD 1.5380.In conducting an analysis of its foreign exchange risk exposure,the company considers the impact of the following exchange rate changes:
i.USD/AUD 1.5180
ii.USD/AUD 1.5280
iii.USD/AUD 1.5480
Which of the exchange rate scenarios represents foreign exchange risk to the company?
A) i
B) ii
C) iii
D) All of the given answers are correct

Accepted Answer

The answer of A US-based company that is exporting car...

Question 9

An Australian company with subsidiary operations in a number of international markets has an audit into its financial risk exposures that reveals it has a potential exposure to translation risk.Which of the following statements relates to its translation risk exposure?
A) The company has export contracts written in USD receipts over the next twelve months.
B) Interest repayments on euromarket funding are payable in DEM.
C) Assets and liabilities of its subsidiary companies are denominated in foreign currencies.
D) All of the given answers are correct.

Accepted Answer

Translation risk arises when a company has assets and liabilities denominated in foreign currencies. This means that changes in exchange rates between the reporting date and settlement date could impact the company's financial statements. Options A and B are examples of transaction risk, which is different from translation risk. Option D is incorrect as it includes option A and B, which are incorrect.

Question 10

The part of a company that is responsible for balance sheet funding,managing cash flows and financial risk management is the:
A) accounting and reporting division.
B) management and audit division.
C) treasury division.
D) tax management division.

Accepted Answer

The treasury division is responsible for managing a company's financial resources and ensuring there is enough funding for balance sheet requirements. They also manage cash flows and financial risk, such as foreign currency risk or interest rate fluctuations. The other divisions listed (accounting and reporting division, management and audit division, tax management division) have different responsibilities that do not directly relate to balance sheet funding and financial risk management.

Question 11

A decentralised FX operation is where:
A) the control of Treasury policy development and FX trading is spread equally between the directors of the company.
B) Treasury policy and FX trading is spread between the divisions of the company.
C) Treasury policy development and FX trading is associated with several regional offices.
D) Treasury policy development is associated with the head office of the company, and FX trading is spread between several regional offices.

Accepted Answer

A decentralized FX operation involves distributing treasury policy development and FX trading across several regional offices, allowing for localized decision-making and operations.

Question 12

Transaction exposure and operating exposure differ in that transaction exposure:
A) derives from a company's foreign-currency-denominated cash flows, and operating exposure applies to the impact of exchange rate volatility on the value of the assets and liabilities of a company's foreign operations.
B) derives from a company's foreign-currency-denominated cash flows, and operating exposure applies to the impact of exchange rate volatility on future cash flows.
C) derives from a company's foreign-currency-denominated cash flows, and operating exposure applies to the impact of exchange rate volatility on foreign operations.
D) applies to the impact of exchange rate volatility on future cash flows, and operating exposure applies to the impact of exchange rate volatility on foreign operations.

Accepted Answer

Transaction exposure is related to the effect of exchange rate changes on a company's foreign-currency-denominated transactions, such as receivables and payables. Operating exposure, also known as economic exposure, refers to the impact of exchange rate fluctuations on a company's future cash flows, including revenues and expenses, beyond those financial transactions.

Question 13

A centralised FX operation is where:
A) the control of Treasury policy development and FX trading is spread equally between the directors of the company.
B) Treasury policy and FX trading is spread between the divisions of the company.
C) Treasury policy development and FX trading is associated with several regional offices.
D) for a company all FX transactions occur in one single location.

Accepted Answer

The answer of A centralised FX operation is where:
A) the...

Question 14

A company is about to implement its new foreign exchange risk management strategy.Which of the following controls should the company have in place before it actually implements the strategy?
A) Daily and other periodic foreign currency exposure reports
B) Foreign exchange exposure limits by currency and country
C) Foreign exchange strategy reporting and review process
D) All of the given answers

Accepted Answer

All of the given controls are necessary before implementing the foreign exchange risk management strategy. Daily and periodic exposure reports help track the company's foreign currency positions, exposure limits by currency and country ensure that the company doesn't exceed its risk appetite, and a reporting and review process allows for the evaluation of the effectiveness of the strategy. Therefore, all of these controls should be in place before the strategy is implemented.

Question 15

An Australian company is preparing to export beer into the lucrative German market in direct competition with the established local brewers.There is some concern within the company that it is exposed to foreign exchange risk.To which type of foreign exchange risk is the company initially exposed?
A) Transaction risk exposure
B) Sovereign risk exposure
C) Translation risk exposure
D) Economic risk exposure

Accepted Answer

The answer of An Australian company is preparing to export...

Question 16

A company that is preparing a report on its current net cash-flow exposures to foreign exchange risk is only concerned with its net foreign currency cash exposure.Which of the following items are necessary for the report?
i.Timing of each transaction
ii.Amount of each receivable and payable
iii.Country of origin of foreign cash flow
iv.Currency of each transaction
A) i, ii, iii
B) i, ii, iv
C) i, iii, iv
D) ii, iii, iv

Accepted Answer

The company is only concerned with its net foreign currency cash exposure, which is calculated by subtracting the foreign currency payable from the foreign currency receivable. Therefore, only the timing and amount of each transaction and the currency of each transaction are necessary for the report. The country of origin of foreign cash flow is not relevant to calculating the net exposure.

Question 17

A company is reviewing the function of foreign exchange within its treasury division.Which one of the following is NOT one of the 'controls' the company should have in place for the FX function?
A) There should be specified monetary limits for single transactions.
B) Authorisations should be required for FX products.
C) The tasks of dealing, back office, technology support, administration and audit should be segregated.
D) The net value of outstanding FX buys and sell transactions yet to be settled is called an exception report.

Accepted Answer

Option D is not a control that should be in place for the FX function. It is a report that is generated to monitor outstanding FX transactions and does not serve as a control measure. A, B, and C are all control measures that a company should have in place for the FX function, such as specifying monetary limits, requiring authorizations, and segregating the tasks of different teams involved in the FX process.

Question 18

A company is reviewing the function of foreign exchange within its treasury division.Which one of the following is NOT one of the 'controls' the company should have in place for the FX function?
A) There should be specified monetary limits for single transactions.
B) Authorisations should be required for FX products.
C) Only nominated FX dealers can carry out the tasks of confirmation, settlement and reconciliation.
D) Periodic reports should be forwarded to a nominated manager.

Accepted Answer

C is incorrect because it suggests that only nominated FX dealers can carry out the tasks of confirmation, settlement, and reconciliation. In effective control environments, these tasks are typically segregated among different individuals or departments to prevent fraud and errors, ensuring that no single individual has control over all aspects of a transaction.

Question 19

For a large multinational company the FX dealers:
A) are generally located in the FX dealing room.
B) must not be allowed to carry out back office tasks of confirmation, settlements or reconciliation.
C) must take into account the foreign currency limit that they are authorised to trade in.
D) all the given choices are correct.

Accepted Answer

All the given choices are correct. FX dealers in a large multinational company are generally located in the FX dealing room and must not be allowed to carry out back office tasks of confirmation, settlements, or reconciliation. Additionally, they must take into account the foreign currency limit that they are authorized to trade in.

Question 20

Consider the following statements:
i.'Transaction exposure' refers to the risk that in the long run a company's net present value may be affected by future changes in the foreign exchange rate.
ii.Foreign exchange 'economic' risk exposure is a measure of the effect that a change in the exchange rate will have on the value of a company's worth.
iii.Foreign exchange risk implies that every change in the exchange rate will have detrimental effects on the home currency value of a company's foreign currency assets,liabilities and transactions.
iv.A company's board of directors is responsible for establishing policy in relation to the measurement and management of FX risk exposures within the company.
v.If an Australian-based company has a USD 1 million payable and a USD 1 million receivable,both due on 1 July next year,it is not exposed to FX risk.
How many of these statements are true and how many are false?
A) 1 statement is true and 4 are false
B) 2 statements are true and 3 are false
C) 3 statements are true and 2 are false
D) 4 statements are true and 1 is false

Accepted Answer

i. False - Transaction exposure refers to the risk that in the short term a company's cash flows may be affected by future changes in the foreign exchange rate.
ii. True - Foreign exchange economic risk exposure measures the effect that changes in exchange rates will have on a company's value.
iii. False - Foreign exchange risk can have both positive and negative effects on a company's foreign currency assets, liabilities, and transactions.
iv. True - The board of directors has responsibility for establishing policy in relation to the measurement and management of FX risk exposures within the company.
v. False - The company is exposed to FX risk because the exchange rate may change between now and the due date, impacting the value of the payable and receivable.

Quiz 17: Foreign Exchange: Risk Identification and Management

In order to have specific policies in relation to FX management which part of the company needs to establish FX policies?

In relation to potential FX exposures,historical data suggests to manage FX exposures:

Which of the following about foreign exchange objectives for a large company is incorrect?

When a company has an open FX position,this means:

According to the text,which person(s) in the company is responsible to ensure that operational procedures concerned with FX management are developed?

When a company analyses and forecasts foreign exchange movements and then applies strategies based on this,this strategy is called:

An Australian company with subsidiary operations in a number of international markets has an audit into its financial risk exposures that reveals it has a potential exposure to translation risk.Which of the following statements relates to its translation risk exposure?

The part of a company that is responsible for balance sheet funding,managing cash flows and financial risk management is the:

A decentralised FX operation is where:

Transaction exposure and operating exposure differ in that transaction exposure:

A centralised FX operation is where:

A company is about to implement its new foreign exchange risk management strategy.Which of the following controls should the company have in place before it actually implements the strategy?

An Australian company is preparing to export beer into the lucrative German market in direct competition with the established local brewers.There is some concern within the company that it is exposed to foreign exchange risk.To which type of foreign exchange risk is the company initially exposed?

A company is reviewing the function of foreign exchange within its treasury division.Which one of the following is NOT one of the 'controls' the company should have in place for the FX function?

A company is reviewing the function of foreign exchange within its treasury division.Which one of the following is NOT one of the 'controls' the company should have in place for the FX function?

For a large multinational company the FX dealers: