ExpertEasy2 marksMultiple Choice
ACCA · Question 26 · Risk Management
Section B - Case 3: GlobalCart
Scenario: GlobalCart is a UK-based cross-border e-commerce company. Its functional currency is the British Pound (GBP).
GlobalCart imports electronics from the US and exports them to Europe.
The company expects to receive EUR 500,000 in 3 months from European customers.
It also needs to pay USD 300,000 in 6 months to its US suppliers.
Question:
The risk that the GBP value of the EUR 500,000 receipt will fall between now and the settlement date in 3 months is known as what type of risk?
Section B - Case 3: GlobalCart
Scenario: GlobalCart is a UK-based cross-border e-commerce company. Its functional currency is the British Pound (GBP).
GlobalCart imports electronics from the US and exports them to Europe.
The company expects to receive EUR 500,000 in 3 months from European customers.
It also needs to pay USD 300,000 in 6 months to its US suppliers.
Question:
The risk that the GBP value of the EUR 500,000 receipt will fall between now and the settlement date in 3 months is known as what type of risk?
Answer options:
A.
Translation risk
B.
Economic risk
C.
Transaction risk
D.
Basis risk
How to approach this question
Identify the type of foreign exchange risk that arises from short-term, specific cash flows (receivables and payables).
Full Answer
C.Transaction risk✓ Correct
Transaction risk is the risk of adverse exchange rate movements occurring in the course of normal international trading, specifically between the time a transaction is agreed/invoiced and the time the cash is actually paid or received.
Common mistakes
Confusing transaction risk with translation risk (which is purely an accounting consolidation issue).
Practice the full ACCA FM — Financial Management Practice Exam 1
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