Risk Management (3)

Question 1

How can a company transfer transaction risk to the customer

Answer 1

Invoicing in the company’s domestic currency as an exporter could demoninate sales invoices in its domestic currency

Question 2

If domestic currency is expected to fall (leading)

Answer 2

This leads to a finance cost.

Question 3

If the domestic currency is expected to appreciate (lagging)

Answer 3

Potential delaying coversion and paying suppliers late

Question 4

What is netting?

Answer 4

There are both sales/receivables and purchases/payables in a foreign currency so the net exposure is only on the difference between receivables and payables

Question 5

Benefit of netting?

Answer 5

Can result in a reduction in foreign exchange purchase costs and money transmission costs.

Question 6

What does matching of assets and liabilities?

Answer 6

Considers using foreign currency loans to finance overseas subsidiaries

Question 7

What can overseas earnings be used for?

Answer 7

To pay the loan interest and repay principal. reducing the net foreign currency cash flow exposed to risk in the event of repatriation to the parent

Question 8

What is the matching of receipts and payments?

Answer 8

The offsetting of payments against receipts in a foreign currency, using a foreign currency bank account

Question 9

Does matching of receipts and payments affect currency strength?

Answer 9

No, as there is no purchase or sale of the currency

Question 10

What is asset and liability management?

Answer 10

Overseas subsidiaries borrow locally rather than receiving finance from the parent. Reduces net assets of the subsidiary