The Change in Value of consolidated financial Statements of o firm is the main c

Question

The Change in Value of consolidated financial Statements of o firm is the main concern for an American Iimi with operations in multiple countries. This risk is called: a) economic risk h) translation risk c) transaction risk 11) An American firm sets up a plant to make cars in Mexico and it has a life of IO years. the kind of risk that the American firm faces over the entire course of ten year* based on unexpected changes in exchange rates and other macro economic events is called: a) 'Transaction risk b) Economic risk c) translation risk 12) The condition under which an I Jnhedged strategy (do not hedge at all) would out perform say a forward market hedge will be as follows: An American firm owes say 100.000 pounds in the future. They expect the pound to depreciate between now and the future. If so. then you what be better of not hedging at all. True or False

Explanation / Answer

10. As the risk of American firm is related to translation of Subsidiary accounts in different countries having different currencies to USD, the risk is called translation Risk.

So Correct Option is b.

11. As the risk faced by the American firm for its Mexico operation is related to Exchange rate fluctuations and other changes in economic conditions, the risk will be called Economic Risk.

So Option b is correct.

12. As the American owes 100,000 pounds and the pound in expected to devaluate, the firm will pay same pounds with lesser USD. So no hedge policy is better in this situation. The statement is true.

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