WRITE YOUR ANSWER TO THIS QUESTION ON THE EXAM PAPER IN THE SPACE ASSIGNED FOR THIS QUESTION NUMBER.

If company in Pandora, which uses soles, is expecting a payment in pesos in two months, what can it do to reduce transaction risk?

Question

WRITE YOUR ANSWER TO THIS QUESTION ON THE EXAM PAPER IN THE SPACE ASSIGNED FOR THIS QUESTION NUMBER.

If company in Pandora, which uses soles, is expecting a payment in pesos in two months, what can it do to reduce transaction risk?

BlackTom AI · Accepted Answer

Hedging through a forward contract, option, or other techniques can eliminate or reduce transaction exposure, so True.

1) Relevant concepts
- Transaction exposure: the risk that exchange rate movements between now and the settlement date change the domestic-currency value of a known foreign-currency receivable (pesos) for a firm operating in another currency (soles).
- Common hedging tools: forward contracts (lock a rate), currency options (protect downside, allow upside), money‑market hedges (borrow/lend to synthetically lock rates), invoice currency clauses, and operational hedges (netting, leading/lagging).

2) Reasoning process (step-by-step)
- The Pandora company expects a known peso receivable in two months. Between now and receipt, the peso/sol exchange rate could move adversely, changing the soles value.
- To remove that uncertainty the company can enter a two‑month forward contract to sell pesos for soles at a fixed forward rate. That locks the soles amount to be received and removes exchange‑rate risk.
- Alternatively, it could buy a peso put/sol call option to guarantee a minimum soles amount while retaining upside if the peso strengthens, or use a money‑market hedge.

3) Example calculation (intermediate steps)
- Suppose expected receipt = 100,000 pesos.
- Two‑month forward rate quoted = 0.24 soles per peso.
- If the company sells 100,000 pesos forward: locked proceeds = 100,000 × 0.24 = 24,000 soles.
- If unhedged and the spot in two months falls to 0.20, proceeds = 100,000 × 0.20 = 20,000 soles (a 4,000‑sol loss relative to the forward). The forward prevented that loss.

4) Why the correct answer is correct
- The described actions (forward/option/money‑market hedge) directly address transaction exposure by fixing or protecting the exchange rate outcome for the future peso receipt, thereby reducing or eliminating transaction risk.

5) Why the other option (False) is incorrect
- Saying False implies there is no effective way to reduce transaction risk for a known future foreign‑currency receivable, which is incorrect because well‑established financial hedges and operational techniques exist specifically to manage this risk.

6) Conclusion
- The correct True answer is confirmed: the company can reduce transaction risk (for example, by using a forward contract), so the provided answer True is correct.

WRITE YOUR ANSWER TO THIS QUESTION ON THE EXAM PAPER IN THE SPACE ASSIGNED FOR THIS QUESTION NUMBER. If company in Pandora, which uses soles, is expecting a payment in pesos in two months, what can it do to reduce transaction risk?判断题

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