ACCA Financial Management (F9) Certification Practice Exam

Which risk refers to adverse exchange rate movements that happen during international trading transactions?

1. Translation risk

2. Transaction risk

3. Economic risk

4. Interest rate parity

The correct answer is: Transaction risk

The correct answer is transaction risk, which specifically pertains to the potential for adverse exchange rate movements that can occur during the period between entering into an international trade contract and the actual settlement of that contract. This type of risk affects cash flows and profit margins, as fluctuations in exchange rates can change the amount of money that a company receives or pays in its local currency when doing business in foreign currencies. In international transactions, a company often agrees to buy or sell a product at a specific rate, but between the agreement and the payment, exchange rates can vary significantly. If the value of the foreign currency falls relative to the company's local currency, it may result in lower revenue when the foreign currency is converted back into the home currency. Other types of risks mentioned in the options have different focuses. For instance, translation risk is related to the impact of exchange rate changes on a company's financial statements when consolidating foreign operations. Economic risk encompasses broader factors such as changes in competitive position due to currency fluctuations, while interest rate parity is a theory in financial markets concerning the relationship between interest rates and exchange rates, rather than a specific risk related to trading transactions. Understanding transaction risk is crucial for businesses engaged in international trade, allowing them to implement hedging strategies to mitigate potential losses