Certified Management Accountant 2025 – 400 Free Practice Questions to Pass the Exam

Exchange rate risk is categorized as financial risk because it directly relates to the potential for financial loss stemming from fluctuations in currency exchange rates. When a company engages in international transactions, the value of its assets and liabilities in foreign currencies can change owing to these fluctuations, affecting profitability and financial statements.

This type of risk is inherent in any financial operation involving foreign currencies, as changes in exchange rates can impact cash flows, revenues, and expenses. For example, if a U.S.-based company sells products in Europe and the euro depreciates against the dollar, the company may receive less revenue in dollar terms when converting euros back to dollars.

In contrast, operational risk pertains to the internal processes, systems, and people of an organization, while strategic risk concerns the potential negative impact on a company's strategy or overall business objectives. Compliance risk revolves around the potential for legal or regulatory penalties due to non-compliance with laws and regulations. Understanding these distinctions helps in effectively managing different types of risks within an organization.