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Answer: The main types of FX risks are transaction risk, translation risk and economic risk, which are effectively hedged with FX swaps, FX forwards and FX options.
## Explanation **D is correct** because while the three types of FX risk indeed include Transaction, Translation and Economic Risk, economic risk is not easily quantified and hedged using standard FX derivatives like swaps, forwards, and options. Economic risk is more strategic in nature and is taken into consideration in long-term business decisions rather than being effectively hedged with standard FX instruments. **A, B, and C are incorrect** because they provide accurate definitions of the three types of FX risks: - **Transaction exposure** (A): Correctly describes the risk from exchange rate fluctuations affecting foreign currency payments/receipts - **Translation exposure** (B): Correctly describes the risk from currency fluctuations affecting consolidated financial statements of foreign subsidiaries - **Economic exposure** (C): Correctly describes the risk from unexpected currency fluctuations affecting future cash flows and market value The error in statement D lies in the claim that economic risk can be "effectively hedged" with standard FX derivatives, which is not accurate as economic risk requires strategic management rather than simple hedging.
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An editorial team at a financial education website received a complaint that there were errors in an article. The article in question covers the topic of different types of FX risks that traders face and how to hedge those risks. Which of the following statements should be deleted from the article?
A
Transaction exposure arises from the effect that exchange rate fluctuations have on a company's obligations to make or receive payments denominated in foreign currency.
B
Translation exposure arises from the effect of currency fluctuations on a company's consolidated financial statements, particularly when it has foreign subsidiaries.
C
Economic exposure arises from the effect of unexpected currency fluctuations on a company's future cash flows and market value.
D
The main types of FX risks are transaction risk, translation risk and economic risk, which are effectively hedged with FX swaps, FX forwards and FX options.
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