Easy2 marksMultiple Choice

Risk ManagementRisk managementForeign exchange riskEconomic riskSection B

This question is part of a case study — click to read the full scenario(Case 26)

Section B - Case 3: Nexus Co

Nexus Co is a UK-based manufacturer of specialized robotics. The company exports to Europe and imports components from Japan. The home currency is the GBP (£).

Nexus Co is due to receive €500,000 from a European customer in 3 months.
Exchange rates available:
Spot rate (EUR/GBP): 1.1520 - 1.1560
3-month forward rate (EUR/GBP): 1.1450 - 1.1500

If Nexus Co uses a forward market hedge, what will be the guaranteed GBP receipt?

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ACCA · Question 30 · Risk Management

Section B - Case 3: Nexus Co

Nexus Co's board is discussing the long-term impact of the Japanese Yen depreciating significantly against the British Pound over the next 5 years. They are worried that their Japanese competitors will be able to sell robotics in Europe at much cheaper prices, permanently damaging Nexus Co's market share.

What type of foreign exchange risk is the board describing?

Answer options:

Transaction risk

Translation risk

Economic risk

Basis risk

How to approach this question

Differentiate between the three main types of FX risk: Transaction (short-term cash flows), Translation (accounting consolidation), and Economic (long-term competitiveness).

Full Answer

C.Economic risk✓ Correct

Economic risk (also known as strategic risk) refers to the long-term impact of exchange rate movements on a company's international competitiveness and the present value of its future cash flows. If the Yen weakens, Japanese competitors have lower costs relative to Nexus Co, allowing them to undercut Nexus on price in global markets. This is a classic example of economic risk.

Common mistakes

Confusing economic risk with transaction risk. Transaction risk is short-term; economic risk is long-term and strategic.

Question 29 All questions Question 31

Practice the full ACCA FM — Financial Management Practice Exam 2

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