A British corporation has a subsidiary in China and expects to repatriate profits back to the UK in six months. The corporation decides against using a forward contract. What is the primary drawback of not utilizing a forward contract in this scenario?<\/p>\n\n\n\n
The correct answer and explanation is:<\/strong><\/mark><\/p>\n\n\n\n Correct Answer:<\/strong> When a British corporation has a subsidiary in China and expects to repatriate profits back to the UK in six months<\/strong>, it means the company will convert Chinese yuan (CNY) into British pounds (GBP) in the future. Currency values fluctuate constantly due to economic indicators, political events, interest rate changes, and market sentiment. This fluctuation creates exchange rate risk<\/strong>, also known as foreign currency risk<\/strong>.<\/p>\n\n\n\n By choosing not to use a forward contract<\/strong>, the corporation is essentially leaving its future currency conversion open to market fluctuations. A forward contract<\/strong> is a financial agreement that locks in a specific exchange rate for a future date. If the company had used a forward contract, it would have been able to guarantee the amount of pounds it would receive<\/strong> in six months, regardless of the changes in the CNY\/GBP exchange rate.<\/p>\n\n\n\n Without a forward contract, the company faces the risk that the yuan may depreciate<\/strong> against the pound over the six-month period. If this happens, when the profits are converted back into pounds, the amount received will be lower than expected<\/strong>, reducing the company\u2019s earnings in GBP terms. This unpredictability can have a negative impact on financial planning, budgeting, and shareholder value.<\/p>\n\n\n\n While it may also be possible that the yuan appreciates and the company benefits from a better exchange rate, this is speculative and unpredictable. Most corporations prefer financial certainty<\/strong> over speculation, especially in large transactions.<\/p>\n\n\n\n Thus, the primary drawback<\/strong> of not using a forward contract is exposure to adverse currency movements<\/strong>, which can negatively affect the value of repatriated profits and financial performance. Hedging with forward contracts is a common risk management strategy used to avoid such volatility.<\/p>\n","protected":false},"excerpt":{"rendered":" A British corporation has a subsidiary in China and expects to repatriate profits back to the UK in six months. The corporation decides against using a forward contract. What is the primary drawback of not utilizing a forward contract in this scenario? The correct answer and explanation is: Correct Answer:The primary drawback of not utilizing […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-21848","post","type-post","status-publish","format-standard","hentry","category-quiz-questions"],"_links":{"self":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/21848","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/comments?post=21848"}],"version-history":[{"count":1,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/21848\/revisions"}],"predecessor-version":[{"id":21849,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/21848\/revisions\/21849"}],"wp:attachment":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/media?parent=21848"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/categories?post=21848"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/tags?post=21848"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
The primary drawback of not utilizing a forward contract in this scenario is exposure to exchange rate risk<\/strong>.<\/p>\n\n\n\n
\n\n\n\nExplanation (300 words):<\/strong><\/h3>\n\n\n\n