StuffNThings Co., a Wonderland company, must pay a factory in Neverland 8 million NLP for a shipment of toys in 6 months. StuffNThings Co. faces:

Question

BlackTom AI · Accepted Answer

Transaction risk arises when a firm has a contractual foreign-currency-denominated receivable or payable that will be settled at a future date.

1. Relevant knowledge points and concepts
- Transaction risk (also called transaction exposure): the risk that exchange rate movements between the transaction date and settlement date will change the domestic-currency value of a specific foreign-currency payable or receivable.
- Translation risk: the accounting risk that consolidated financial statements will change in value when foreign subsidiaries’ financials are translated into the parent’s reporting currency — this is a reporting/measurement issue, not the risk of cash flow changes on a settled contract.
- “No exchange rate risk” would apply only if the contract were denominated in the firm’s domestic currency or fully hedged.

2. Step-by-step reasoning
Step 1: StuffNThings Co. has a contractual obligation to pay 8 million NLP in 6 months. That is a future cash outflow denominated in a foreign currency.  
Step 2: Between now and settlement, the NLP/Wonderland-currency exchange rate can move. If NLP strengthens, the cost in home currency rises; if NLP weakens, the cost falls.  
Step 3: Because the payable is fixed in NLP and settlement is in the future, the company faces exposure to exchange-rate movements that will affect the domestic-currency amount actually paid.

3. Example calculation (intermediate steps)
Assume current rate = 1 NLP = 0.50 W$ → 8,000,000 NLP = 4,000,000 W$.  
If in 6 months rate = 0.60 W$/NLP → cost = 8,000,000 × 0.60 = 4,800,000 W$ (increase).  
If in 6 months rate = 0.40 W$/NLP → cost = 8,000,000 × 0.40 = 3,200,000 W$ (decrease).  
These changes show direct cash-flow impact from exchange-rate movements.

4. Why the correct answer is correct
This is the textbook definition of transaction risk: a known foreign-currency cash flow payable in the future exposes the firm to exchange-rate variability affecting actual domestic payment.

5. Why other options are incorrect
- “No exchange rate risk”: incorrect because the payable is in NLP and the domestic cost can change with exchange rates.  
- “Translation risk”: incorrect because translation risk pertains to converting foreign financial statements for reporting; it does not describe the cash-flow exposure from a specific payable due in 6 months.

6. Conclusion
The exposure described is transaction risk. This matches the provided correct answer: transaction risk.

StuffNThings Co., a Wonderland company, must pay a factory in Neverland 8 million NLP for a shipment of toys in 6 months. StuffNThings Co. faces:单项选择题

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