Lazer Co. is a U.S. firm that exports computers to Belgium invoiced in euros and to Italy invoiced in dollars. Additionally, Lazer Co. has a subsidiary in Korea that produces computers in South Korea and sells them there. Lazer also has competitors in different countries. Lazer Co. is subject to:
A) transaction exposure.
B) economic exposure.
C) translation exposure.
D) all of the above.

Question

Quizplus · Accepted Answer

Lazer Co. is subject to all three types of foreign exchange risk:

A) Transaction exposure: This is the risk that arises from fluctuations in exchange rates between the time of the sale and the time of payment. Lazer Co. faces transaction exposure in both Belgium (due to invoicing in euros) and Italy (due to invoicing in dollars).

B) Economic exposure: This type of risk is also known as operating exposure or strategic exposure. It arises from the impact of exchange rate movements on a company's future cash flows, market share, and competitive position. Lazer Co. has competitors in different countries, and its subsidiaries are based in countries with different currencies. This exposes the company to economic exposure.

C) Translation exposure: This is the risk that arises from translating financial statements of a foreign subsidiary into the parent company's reporting currency. Lazer Co. has a subsidiary in South Korea that produces computers and sells them there. Any financial statements related to the subsidiary will need to be translated into the U.S. dollar for corporate reporting purposes, exposing the company to translation exposure.

Lazer Co Is a U