Question : What is the term used to describe the risk that changes in exchange rates will impact the profitability of a company's international trade transactions?

Option 1: Operational risk
 

Option 2: Credit risk
 

Option 3: Market risk

 

Option 4: foreign exchange risk  

Correct Answer: foreign exchange risk

Solution : The correct answer is d) Foreign exchange risk

The term used to describe the risk that changes in exchange rates will impact the profitability of a company's international trade transactions is foreign exchange risk.

Foreign exchange risk arises from the potential fluctuations in currency exchange rates between the time a transaction is initiated and settled. When a company engages in international trade and conducts transactions in different currencies, changes in exchange rates can affect the value of those transactions.

Foreign exchange risk can impact a company's profitability in several ways. If a company has payables or receivables denominated in foreign currencies, fluctuations in exchange rates can affect the cost of imports or the value of exports. This can result in potential gains or losses when the foreign currency is converted back into the company's domestic currency.

Companies can manage foreign exchange risk through various strategies, such as hedging with derivative instruments, entering into forward contracts, using natural hedging techniques, or diversifying their currency exposures. Managing foreign exchange risk is essential for companies engaged in international trade to mitigate potential financial losses and ensure stability in their operations.