A firm considers an exporting project and will invoice the exports in dollars. The expected cash flows in dollars would be more difficult if the currency of the foreign country is ____.
A) fixed
B) volatile
C) stable
D) none of the above, as the firm is not exposed

Question

Quizplus · Accepted Answer

If the currency of the foreign country is volatile, it means that its value can fluctuate significantly in a short amount of time, which makes it difficult to predict the expected cash flows in dollars. This uncertainty can make it challenging for the firm to manage its financial risks and make informed business decisions. A fixed or stable currency would be more predictable and therefore easier to manage. Option D is also incorrect because even if the firm is invoicing in dollars, it may still be exposed to foreign exchange risk if it has to convert the currencies at some point in the transaction.

A Firm Considers an Exporting Project and Will Invoice the Exports