As the risk manager in a multinational corporation, you are concerned about the translation risk associated with your Canadian subsidiary and the transaction risk associated with sales and purchases in CAD. The current value of your subsidiary is CAD 400,000. You have purchased a series of CAD forward exchange contracts totaling CAD 600,000. Why did you purchase so much CAD?Group of answer choicesYou are treating both the translation risk and ongoing transaction risksYou made a mistakeThat’s what the risk policy said to doThe CAD seemed undervalued and looked like a good buy

The reason for purchasing so much CAD is: You are treating both the translation risk and ongoing transaction risks.

Here's why:

1. Translation risk is the risk that a company's financial statements can be affected by changes in exchange rates when they have foreign operations. In this case, the risk manager is concerned about the translation risk associated with their Canadian subsidiary, which is valued at CAD 400,000.

2. Transaction risk is the risk that a company's cash flows can be affected by changes in exchange rates when they have sales and purchases in foreign currencies. In this case, the risk manager is concerned about the transaction risk associated with sales and purchases in CAD.

3. By purchasing CAD forward exchange contracts totaling CAD 600,000, the risk manager is effectively hedging against both types of risk. The CAD 400,000 portion of the contracts can be used to hedge against the translation risk associated with the subsidiary, and the remaining CAD 200,000 portion of the contracts can be used to hedge against the transaction risk associated with sales and purchases.

The other options are not as likely because:

• Making a mistake is always a possibility, but given the context, it seems more likely that the risk manager is intentionally hedging against both types of risk.
• The risk policy might dictate certain actions, but without more information, it's not clear that this is the reason for the large purchase of CAD.
• The CAD being undervalued could be a reason for buying it, but this would be more of an investment decision rather than a risk management decision.