In relation to its dealings with customers in the US, a business based in Ireland is directly subject to which form of investment risk?

• A. Exchange rate
• B. Liquidity
• C. Interest rate
• D. Inflation

Answer: (A)

When a business based in Ireland sells to customers in the United States, it earns revenue in US dollars but reports in euros. That creates currency exchange risk because the euro value of those US dollar receipts changes as exchange rates move. If the dollar strengthens against the euro, the euro amount of the sales falls; if the dollar weakens, the euro amount rises. This direct sensitivity to currency movements is the essence of exchange rate risk, a form of foreign-exchange exposure arising from cross-border dealings.

Liquidity risk is about the ability to meet cash obligations, which isn’t the primary effect here. Interest rate risk concerns changes in borrowing or investment returns due to rate moves, and inflation risk concerns changes in purchasing power; neither captures the impact of converting foreign sales into the home currency.