The correct answer is D. All of the above.
Foreign exchange risk is the risk that a change in the exchange rate between two currencies will have an adverse effect on a company’s financial performance. Transaction risk is the risk that a change in the exchange rate between the currencies of two countries will affect the value of a specific transaction, such as the purchase or sale of goods or services. Translation risk is the risk that a change in the exchange rate between the currencies of two countries will affect the value of a company’s financial statements when they are translated into another currency. Economic risk is the risk that a change in the exchange rate between the currencies of two countries will affect a company’s economic performance, such as its sales, profits, and cash flow.
Here is a more detailed explanation of each type of risk:
- Transaction risk: Transaction risk is the risk that a change in the exchange rate between the currencies of two countries will affect the value of a specific transaction, such as the purchase or sale of goods or services. For example, if a company buys goods from a supplier in another country, and the exchange rate between the two currencies changes before the company pays the supplier, the company may have to pay more or less than it originally expected.
- Translation risk: Translation risk is the risk that a change in the exchange rate between the currencies of two countries will affect the value of a company’s financial statements when they are translated into another currency. For example, if a company has a subsidiary in another country, and the exchange rate between the two currencies changes, the value of the subsidiary’s assets and liabilities on the company’s consolidated financial statements will change.
- Economic risk: Economic risk is the risk that a change in the exchange rate between the currencies of two countries will affect a company’s economic performance, such as its sales, profits, and cash flow. For example, if a company’s customers are in another country, and the exchange rate between the two currencies changes, the company’s sales may increase or decrease.