Economic Exposure: based on the extent to which the value of the firm --- as measured by the present value of its expected future cash flows --- will change when exchange rates change.
Two components: Transaction Exposure and Operating Exposure.
Transaction exposure: exchange gains or losses on foreign currency-denominated contractual obligations (short term).
Transaction exposure arises out of the various types of transactions that require settlement in a foreign currency. Such as borrowing and lending in foreign currencies, the local purchasing and sales activities of foreign subsidiaries, lease payment, forward contracts, loan repayment and other contractual or anticipated foreign currency receipts and disbursements.
Operating exposure: the future gains or losses on revenues and costs because of real exchange rate changes (long term).
Managing operating exposure:
1. Market selection
2. Payoff between price and volume
3. Product innovation.
4. Global purchasing and production.
5. Financial management: hedging.
Two components: Transaction Exposure and Operating Exposure.
Transaction exposure: exchange gains or losses on foreign currency-denominated contractual obligations (short term).
Transaction exposure arises out of the various types of transactions that require settlement in a foreign currency. Such as borrowing and lending in foreign currencies, the local purchasing and sales activities of foreign subsidiaries, lease payment, forward contracts, loan repayment and other contractual or anticipated foreign currency receipts and disbursements.
Operating exposure: the future gains or losses on revenues and costs because of real exchange rate changes (long term).
Managing operating exposure:
1. Market selection
2. Payoff between price and volume
3. Product innovation.
4. Global purchasing and production.
5. Financial management: hedging.