An American manufacturer with its corporate headquarters in New York City is purchasing goods from a French supplier. Which of the following statements is true regarding the exchange rate risk for this contract?

Question

BlackTom AI · Accepted Answer

The question asks about exchange rate risk in a cross-border purchase: an American company in New York buying from a French supplier, with the options describing who bears risk under different currency denominations.
Option a: The French company will bear all of the exchange rate risks if the contract is denominated in Euros.
In practice, exchange rate risk arises from the need to convert foreign currency into the home currency or to the currency in which the payment is settled. If the contract is denominated in euros, the payer (the party obligated to pay in euros) could be exposed to movements in the euro/foreign-currency value up to the point of payment, and depending on the payment timing and hedging arrangements, either party could bear the risk. Therefore this statement describes one possible risk allocation, but it is not universally true in all contract structures; risk can shift based on who is obligated to convert currencies and what hedges or terms are agreed.
Option b: The American company will bear all of the exchange rate risks if the contract is denominated in US dollars.
If the contract is settled in US dollars, the French supplier would receive dollars and convert them to euros if needed. The French supplier may face exchange rate risk in that conversion process or in any hedging the seller uses, while the American buyer’s cash flows in USD reduce their own FX exposure related to the payment currency. This statement describes another potential allocation, but again it is contingent on the specific terms of the deal and hedging strategies. Thus it is not universally true that the American company bears all risk.
Option c: Both companies could bear the exchange rate risk if the contract is denominated in British pounds.
This option highlights a scenario where neither party’s home currency is the contract currency, creating a potential for both sides to be exposed depending on when and how payments are made and whether either party hedges. If the contract is in GBP and imports/exports flow with different currencies, both sides can incur FX risk through the timing of cash flows and conversions. Therefore, this statement captures a plausible arrangement where exposure could be shared.
Option d: All of these options.
If you consider that each of the first three statements describes a scenario under which risk could be allocated differently based on contractual terms, currency of denomination, and hedging practices, then it is reasonable to say that all of these are possible depending on the specifics of the agreement. This makes the bundled option plausible in contexts where flexible risk allocation is allowed by contract terms. 
In summary, FX risk allocation in international sales is not fixed solely by the currencies involved; it depends on who is obligated to pay in which currency, the timing of payments, and any hedging arrangements. Each of the first three statements describes a possible, scenario-dependent outcome, and the fourth option aggregates those possibilities into a single answer.

An American manufacturer with its corporate headquarters in New York City is purchasing goods from a French supplier. Which of the following statements is true regarding the exchange rate risk for this contract?

View Explanation

Log in for full answers

Similar Questions