Foreign Exchange Risk Management.doc

HARE KRISHNA
MAFA
IMPORTANT
THEORETICAL QUESTIONS
(With Answers)
------- JAI BHAGWAN
**** Q. No. 100 - 107
*** Most Important Questions
** Important Questions
* Not so Important
Table of Contents
Question Nos.
Chapter
1-9
Foreign Exchange Risk Management
10-15
Options and Futures
16-19
Merger and acquisition
20- 23
Dividend policy
24-30
Risk and return
31-39
Capital Budgeting
40-42
Lease
43-46
General Problems-NBFC, MFs, Sustainable growth
47-48
Foreign Collaboration
49-52
Mutual Funds
53-61
Money market
62-79
capital Market
80-85
International Capital Market
86-90
Public sector undertakings
91-114
General Topics
Foreign Exchange Risk Management
**Q. No. 1 : Explain the term ‘foreign exchange risk’( Nov. 1992)
Answer : Foreign exchange rate is the rate of one currency in terms of other currency.
Foreign exchange risk is defined as the possibility of adverse movement in foreign exchange rates.
If one has to sell the foreign currency in future, the possibility of decline in the rate/price of that currency is foreign exchange rate risk. For example, an Indian firm exports goods when one US dollar is equal to Rs. 45. By the time it receives the payment, one US dollar may be equal to Rs. 44. The result is that the Indian firm will receive lesser amount in terms of rupees.
If one has to buy some foreign currency, the possibility of increase in the rate/price of that currency is foreign exchange rate risk. For example, an Indian firm enters into a contract of import when US $ is equal to Rs. 45. By the time it has to pay, the rate may be Rs. 46, . the Indian firm has to pay more amount of rupees. One more example, an Indian firm borrowed in US $ when one US $ was equal to rupee 45, it has to repay, when one US $ is equal to Rs. 47, the Indian firm has to pay more amount as principal amount pared to what it received.
To conclude : Foreign exchange rate risk refers to such movements in foreign exchange rate th