This part of question 3 required an explanation of the foreign currency risk faced by a multinational company. Answers were expected to explain transaction risk, translation risk and economic risk. Although many answers identified these three risks, explanation was sometimes of variable quality. No credit was given, for obvious reasons, to answers that discussed interest rate risk or credit risk.

Better answers identified the short-term, cash-based nature of transaction risk, contrasting this with the long-term, accounting-based nature of translation risk. Economic risk was explained in several acceptable ways, such as the longer-term counterpart of transaction risk, as the effect on the present value of corporate cash flows of longer-term exchange rate movements, and as the effect on business competition of changes in exchange rates. Candidate answers indicated that explaining economic risk was found to be more difficult than explaining transaction or translation risk.