A Japanese manufacturer with its corporate headquarters in Tokyo 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

We start by restating the scenario to ensure clarity: a Japanese manufacturer with its headquarters in Tokyo is purchasing goods from a French supplier. The question asks which statement about exchange rate risk for this contract is true.

Option a: 'The Japanese company will bear all of the exchange rate risks regardless of what currency the contract is denominated, because the company has to pay the price of the goods.' This is not generally correct. Exchange rate risk depends on the currency in which the contract is denominated and the currencies in which both parties’ costs and revenues are settled. If the contract is denominated in a currency other than JPY (for example EUR or USD), the JPY-based buyer will face risk from movements in that foreign currency relative to JPY. But stating that the Japanese company bears all risk no matter what currency is used ignores scenarios where, for instance, the contract is settled in EUR and the French supplier also faces risk converting EUR to their local currency. So this option overgeneralizes and is incorrect.

Option b: 'None of these options.' This option implies that none of the other statements accurately describe the general truth about exchange rate risk for this cross-border transaction. Given that the other options make absolute claims (e.g., one party always bears all risk, or the other party bears none) that do not hold universally because risk depends on the contract currency and how payments are settled, this statement is plausible as the correct descriptive choice.

Option c: 'Both companies will bear exchange rate risk regardless of what currency the contract is denominated.' This is overly absolute. If the contract is denominated in a currency that is not freely convertible for one party, or if the seller and buyer both have earnings and costs in currencies aligned with their own functional currencies, one party could have minimal or no exposure in certain arrangements. Therefore claiming that both always bear risk regardless of denomination is inaccurate.

Option d: 'The French company will not bear any exchange rate risks because they are selling goods.' This is incorrect because selling goods typically means the French supplier receives payment in a specified currency (often a foreign currency or a foreign-facing invoice currency) and must then convert that payment into euros or another currency. Fluctuations can affect the value of the proceeds when they convert or repatriate funds, so the French company can and often does bear exchange rate risk.

In summary, options a, c, and d assert universal or unilateral risk under all currency-denomination scenarios, which does not reflect how exchange rate risk actually operates in international trade. Option b correctly signals that none of the other statements accurately capture the nuanced reality of exchange rate risk in this context, given that risk depends on the contract currency and settlement arrangements.

A Japanese manufacturer with its corporate headquarters in Tokyo 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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