Treasury & Working Capital Management Flashcards

What does foreign exchange (FX) transaction exposure refer to?

Answer: The risk that exchange rate movements will affect the value of existing foreign currency-denominated contracts

Transaction exposure arises from existing contracts denominated in foreign currency — if exchange rates move before settlement, the company's cash flows are affected.

What is a forward contract used for in FX risk management?

Answer: Locking in an exchange rate today for a future currency exchange, eliminating rate uncertainty

A forward contract obligates both parties to exchange currencies at a predetermined rate on a specified future date, eliminating FX uncertainty on a specific exposure.

What is 'natural hedging' in FX risk management?

Answer: Matching foreign currency revenues with expenses in the same currency to reduce net exposure

Natural hedging reduces FX exposure by structuring operations so that foreign currency inflows and outflows offset each other, reducing the net currency risk.

Which metric best measures how efficiently a company manages its inventory?

Answer: Days inventory outstanding (DIO)

Days Inventory Outstanding (COGS ÷ inventory × days) measures how many days inventory is held before being sold, indicating inventory management efficiency.

What is a letter of credit (LC) in international trade finance?

Answer: A guarantee that a bank will pay the seller on behalf of the buyer upon presentation of required documents

A letter of credit is a bank commitment to pay the seller (exporter) if they present specified shipping and compliance documents, reducing counterparty risk in international transactions.

What is the purpose of netting in multinational treasury operations?

Answer: Offsetting intercompany payables and receivables to minimize the number and value of cross-border payments

Netting reduces transaction costs and FX exposure by offsetting intercompany obligations so only net amounts are transferred between entities.