ExpertEasy2 marksMultiple Choice
ACCA · Question 18.1 · Risk Management
CASE 3: GLOBALBEAN CO
GlobalBean Co is a coffee exporter based in the US (reporting in USD). The company frequently sells coffee beans to European buyers, invoicing in Euros (EUR). GlobalBean expects to receive EUR 500,000 in three months. The company is concerned about foreign exchange risk and interest rate risk on a floating rate loan it holds.
The risk that the EUR 500,000 receipt will be worth fewer USD when it is actually received and converted in three months is known as what type of risk?
CASE 3: GLOBALBEAN CO
GlobalBean Co is a coffee exporter based in the US (reporting in USD). The company frequently sells coffee beans to European buyers, invoicing in Euros (EUR). GlobalBean expects to receive EUR 500,000 in three months. The company is concerned about foreign exchange risk and interest rate risk on a floating rate loan it holds.
The risk that the EUR 500,000 receipt will be worth fewer USD when it is actually received and converted in three months is known as what type of risk?
Answer options:
A.
Translation risk
B.
Transaction risk
C.
Economic risk
D.
Basis risk
How to approach this question
Distinguish between the three main types of FX risk: Transaction (short-term cash flows), Translation (accounting consolidation), and Economic (long-term competitiveness).
Full Answer
B.Transaction risk✓ Correct
Transaction risk is the risk of an exchange rate changing between the date a transaction is agreed (e.g., a sale is made) and the date the cash is actually paid or received. Since GlobalBean is waiting 3 months to receive the EUR 500,000, it faces transaction risk. Translation risk is an accounting risk, and economic risk is a long-term strategic risk.
Common mistakes
Confusing transaction risk with translation risk.
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