Movies4U, a Pandora company, has contracted to pay 10 million PDS to a movie company in Oz upon receipt of a new blockbuster movie. Movies4U faces:

Question

BlackTom AI · Accepted Answer

Because the contract is denominated in PDS—the Pandora group's own currency—Movies4U does not have an exchange-rate exposure on this payable.

Relevant knowledge points:
- Transaction (exchange-rate) risk occurs when a firm has receivables or payables denominated in a foreign currency and the spot/forward exchange rate can change the domestic-currency amount that will be paid or received.
- Translation risk (accounting/consolidation risk) is the potential change in reported consolidated financial statements when a foreign subsidiary’s accounts, kept in a foreign currency, are translated into the parent’s reporting currency.
- If a contract is denominated in the firm’s functional/domestic currency, no exchange-rate risk (transaction exposure) arises for that firm.

Step-by-step reasoning:
1. Movies4U is described as a Pandora company; the currency in the contract is PDS, which is the Pandora currency. That makes the payable a domestic-currency obligation for Movies4U.
2. Transaction exposure would exist only if Movies4U were obliged to pay in a foreign currency (for example, Oz dollars). In that case, exchange-rate movements between PDS and the foreign currency would change the PDS cost of settlement.
3. Because the amount payable is stated in PDS, Movies4U’s cash outflow amount in its own currency is fixed at 10 million PDS; exchange-rate movements do not affect that domestic cash outflow.
4. Translation risk is irrelevant to the economic payment decision here—translation risk affects how foreign-currency financial statements get reported when consolidating, not a single payable denominated in the parent’s own currency.

Why the other choices are incorrect:
- Transaction risk: incorrect because there is no foreign-currency payable; the obligation is in the firm’s domestic currency.
- Translation risk: incorrect because there is no consolidation/translation event caused by a single domestic-currency payable; translation exposure concerns translating a foreign subsidiary’s accounts.

Conclusion: Movies4U faces no exchange rate risk. This matches the provided correct answer: "no exchange rate risk."

Movies4U, a Pandora company, has contracted to pay 10 million PDS to a movie company in Oz upon receipt of a new blockbuster movie. Movies4U faces:Single choice

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