Foreign Exchange Risk Exposure Analysis

Assignment – Foreign exchange risk
exposure
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Table of Contents
Introduction......................................................................................................................................2
Question 1...................................................................................................................................3
Question 2....................................................................................................................................4
Question 3....................................................................................................................................5
Question 4....................................................................................................................................6
Question 5....................................................................................................................................7
Question 6....................................................................................................................................8
Question 7....................................................................................................................................9
Conclusion.....................................................................................................................................10
References:....................................................................................................................................11
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Introduction
The report highlights the meaning of foreign exchange transactions and different types of foreign
exchange risks. It detailed the various aspects as well as its implications for a company engaged
in foreign exchange transactions. This concept has been well explained with the help of a
corporate operating in Australia desiring to expand its business in China. Certain valuable
discussions have been made throughout the project so as to bring a clear understanding of the
topic. The report is prepared to take into consideration all the factors assisting the knowledge of
foreign exchange transactions.
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Question 1
Considering the given situation, it can be concluded that there are various reasons responsible for
being exposed to the foreign exchange risk. Two major reasons responsible for this exposure can
be listed below:
First major and dominant reason is funding the expansion project through the debt financing. In
other words, the concerned company is using majorly debt instead of using equity to expand in
China. According to Malik (2016), going for debt funding is always risky as there is an element
of interest payment irrespective of the financial performance. Unlike debt funding, there is no
requirement of fixed payment in case of equity (Malik, 2016).
Secondly, there is always the possibility of translation exposure in case of international
transactions. Thus, in the given case opting domestic debt funding i.e., Australian debt funding
still will force the concerned Australian based company to foreign exchange rate risk since it
needs to convert it into Chinese yuan.
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