Question

1. What is exchange rate risk?

2. Explain how a soft currency restricts foreign direct investment.

3. Explain how it is possible for a country to not have its own currency.

4. What action ensures that interest rate parity holds?

5. What is the difference between a Eurodollar and a Eurocurrency? What interest rate is tied to Eurodollars?

6. Assuming a company is invested in foreign projects,

a. What two factors contribute to higher risk for the projects?

b. What factor contributes to lower risk for the projects?

7. List two strategies a company can use to reduce the potential loss from expropriation.

Answer 1

1. In finance, Exchange rate risk (which is also known as FX risk or currency risk) is a risk that exists when a financial transaction is denominated in a currency other than that of the base currency of the company (the country in which company is headquartered). So for example, if a firm has liabilities or receivables in currency other than its own base currency, then there will always be the risk of the change of exchange rate between the two currencies.

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