Exchange rate risk arises because the spot exchange rate on a future date is uncertain or a random variable. This uncertainty can affect the returns and cash flows of international businesses and investments. It is not limited to specific types of businesses, and cannot be completely eliminated by legislation or other means. Therefore, it is a significant consideration in foreign investment decisions.

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Exchange Rate Risk

Question 109

Multiple Choice

Exchange rate risk

A) arises from the fact that the spot exchange rate on a future date is a random variable.
B) applies only to certain types of international businesses.
C) has been phased out due to recent international legislation.
D) is not a significant factor in foreign investment decisions.

Correct Answer: