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?

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BlackTom AI · Accepted Answer

Here is a step-by-step examination of each statement in the context of exchange rate risk in an international contract between an American company (HQ in New York) and a French supplier.
Option a: 'The American company will bear all of the exchange rate risk if the contract is denominated in dollars.' In general, if a contract is denominated in a single currency (here, dollars), the party that invoiced in that currency can reduce its exposure, but exchange rate risk can still arise for the other party depending on how the contract is structured and who ultimately bears the currency conversion impact. This statement oversimplifies risk allocation and incorrectly asserts that the American company inherently bears all risk whenever dollars are used, which is not universally true.
Option b: 'The French company will bear all of the exchange rate risk if the contract is denominated in dollars.' When a contract is denominated in dollars, the party outside that currency (the French supplier) often faces currency risk because its costs and profits may be translated into euros or other currencies. However, whether they bear all of the risk depends on the contract terms (pricing, currency clauses, and payment timing). The claim that they will bear all risk is not automatically guaranteed in every case, so this statement can be problematic if taken as an absolute.
Option c: 'Both companies could bear exchange rate risk if the contract is denominated in British pounds.' If the contract uses a currency different from the home currencies of both parties, or if both parties incur exposure due to invoicing in a non-home currency or due to mismatch in cash flow timing, both sides could experience exchange rate risk. Although the contract here is between a U.S. company and a French supplier, the hypothetical scenario mentions British pounds, highlighting that risk can be shared or shifted depending on currency choices and hedging mechanisms. This option recognizes that risk is not fixed to a single party and that currency choice matters for risk allocation.
Option d: 'Both b and c are correct.' This option aggregates the previous two statements, suggesting that both the French company bearing all risk when invoiced in dollars (option b) or both companies bearing risk when invoiced in pounds (option c) can be accurate under certain contractual arrangements. Since each of the statements in b and c contains scenarios where risk allocation is not absolute but contingent on terms and currency, the composite assertion in d reflects the idea that multiple legitimate risk-sharing scenarios can exist depending on contract details.
In summary, option a appears too absolutist about risk allocation in dollar-denominated contracts, while option b describes a situation that can occur but isn’t universally true without contract specifics. Option c correctly notes that currency choice can create risk for both sides in certain circumstances, and option d correctly combines these nuanced observations, acknowledging that different currencyings and terms can lead to different risk allocations. The reasoning here emphasizes that exchange rate risk in international purchasing depends on currency denomination, payment terms, and hedging arrangements rather than a universal rule that assigns all risk to one party.

MCD2170 - T2 - 2025 Week 8 post class homework

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?

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