May 2018 Q5 b.
For an exporter, quoting in a foreign currency immediately produces an exchange exposure.
Required:
i) Explain what is meant by “exchange exposure”. (2 marks)
View Solution
‘Exchange exposure’ relates to the vulnerability of a company to risk arising from changes in the rate of exchange of a foreign currency is facing transaction exposure because he is vulnerable to adverse movements in the rate of exchange of the foreign currency.
ii) Two methods by which pre-acceptance exposure might be minimized. (4 marks)
View Solution
‘Pre-acceptance exposure’ refers to risks arising in the period between the date of the exporters quote and the date on which the content is accepted.
Pre-acceptance exposure can be minimized by:
- Setting a short time limit within which the contract must be accepted ; or
- Buying a forward option to sell the foreign currency forward.
iii) Two methods of hedging against post-acceptance exposure, listing the advantages of each method. (4 marks)
View Solution
‘Post-acceptance exposure’ refers to risks arising in the period between the date of the exporters quote and the date on which the contract is accepted and the date on which the foreign purchaser sends the foreign currency to the exporter.
Post-acceptance exposure can be minimized by;
- Borrowing the foreign currency now, to be repaid out of the sales proceeds when they arrive. The advantages are cheapness and simplicity ;
- Selling the foreign currency forward. The advantage is the certainty of the amount of cedis to be received, without committing cedis resources at the outset.