Exchange rate risk schweser question

Derivatives are most often used to hedge which type of exchange-rate risk? Transaction exposure Economic exposure Translation exposure Credit exposure What do you guys think! I will post the answer!

Transaction exposure

Schweser is suffering from “Frame Dependent” again. However, I will pick Transaction exposure.

it is trans… econ can’t be easily hedged.

transaction i mean

Transaction exposure - Roughly the risk that the amount to be paid or received in foreign currency will change negatively Economic exposure - Risk of change in competitiveness due to change in Exchange risk Translation exposure- Accounting risk only Credit exposure - Risk that other party will default So I’ll say Transaction Exposure. Watch Schweser will say due to the # of CDSs issued last year os something like that its Credit Exposure.

actually everybody had it right, it was transaction. I happen to choose economic exposure!!!

I meant I chose translation

WooHoo! I thought that they were trying to pull a fast one :slight_smile:

I see how the answer is transaction BUT If you have invested in a foreign country - you have to hedge the principal and the increase in value of the invested amount. Hedging the principal is translation risk and I thought that was most important. Hope I’m making sense!

translation risk is only an accounting type entry with the whole Balance sheets translations we had to do last year for L2. Temporal and Current I think.

In R46 they refer to this type of risk as translation risk (risk associated with translating the value of asset back to DC). But yes, given the four options you listed transaction risk is more appropriate. Confusing…