- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 3. Derivative Benefits, Risks, and Issuer and Investor Uses
- Subject 2. Issuer and Investor Use of Derivatives
CFA Practice Question
Suppose that the Enron company knows that it must pay 7 million pounds for goods that it will receive in Britain. The current exchange rate is $1.75/pounds. The risk that the corporate treasurer faces is that ______.
B. the pound exchange rate rises in a month's time to $2.00/pounds.
C. the pound exchange rate does not change from its current position.
D. the pound exchange rate falls in a month's time to $1.25/pounds.
A. the pound exchange rate falls in a month's time to $1.50/pound.
B. the pound exchange rate rises in a month's time to $2.00/pounds.
C. the pound exchange rate does not change from its current position.
D. the pound exchange rate falls in a month's time to $1.25/pounds.
Correct Answer: B
User Contributed Comments 5
| User | Comment |
|---|---|
| DonAnd | ? |
| jingie | Corporate has to make the decision whether to lock in the exchange rate now or later. It downside risk is that the pound will appreciate against the dollar and make the transaction more expensive. |
| jayj001 | foreign liability => risk is foreign appreciating |
| johntan1979 | $14 million, instead of $12.25 million Exchange rate risk |
| To-be-CFA | Risk would only increase with increase in exchange rate. |