International Finance and Treasury MCQ Questions and Solutions with Explanations | Management

The external method of hedging transaction exposure does not include Cross hedging. A cross hedge is used to manage risk by investing in two positively correlated securities that have similar price movements. The investor takes opposing positions in each investment in an attempt to reduce the risk of holding just one of the securities.

The cost of hedging through option includes Option premium and Interest on option premium till due date of the contract.

Foreign currency exposures can be avoided by denominating the transaction in domestic currency. Foreign Exchange Exposure refers to the risk associated with the foreign exchange rates that change frequently and can have an adverse effect on the financial transactions denominated in some foreign currency rather than the domestic currency of the company.

Forward contract is an agreement to buy or sell an assets on Specified price. A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.

The International Finance Corporation (IFC) is an international financial institution that offers investment, advisory, and asset-management services to encourage private-sector development in less developed countries. The IFC is a member of the World Bank Group and is headquartered in Washington, D.C. in the United States. It was established in 1956, as the private-sector arm of the World Bank Group, to advance economic development by investing in for-profit and commercial projects for poverty reduction and promoting development.

For the purpose of translation exposure, historical rate is the rate prevalent on the date of the asset was acquired or the liability was incurred. Translation exposure (also known as translation risk) is the risk that a company's equities, assets, liabilities or income will change in value as a result of exchange rate changes. This occurs when a firm denominates a portion of its equities, assets, liabilities or income in a foreign currency.

Temporary method is not established method of translation. Temporal rate method, or the historical rate method, is employed to convert the financial statements of a parent company’s foreign subsidiaries from its local currency to its “reporting” or “functional” currency when the functional currency and the local currency are not the same. Temporal Method is also utilized at the time of acquisition of assets and liabilities.

Two tier exchange rate system is a form of Multiple exchange rate. In a multiple exchange rate system, the concept is the same, except the market is divided into many different segments, each with its own foreign exchange rate, whether fixed or floating.

International investments have less political risk than domestic investments is not a reason for international investment. International investing is an investing strategy that involves selecting global investment instruments as part of an investment portfolio. People often invest internationally to broaden diversification and spread investment risk among foreign markets and companies.

The forward market is especially well suited to offer hedging protection against transactions risk exposure. A forward market is an over-the- counter marketplace that sets the price of a financial instrument or asset for future delivery.