Economic exposure

Definition

Economic exposure refers to the risk that a company's cash flow, foreign investments, or earnings may be affected by exchange rate fluctuations. It is a long-term effect impacting the market value of a firm due to changes in currency rates.

5 Must Know Facts For Your Next Test

1. Economic exposure can affect both domestic and multinational companies.
2. It is different from transaction exposure, which deals with short-term cash flows and contracts.
3. Economic exposure impacts the competitive position of a company in the global market.
4. It can be managed through strategic planning, such as diversifying markets and production locations.
5. Financial instruments like forward contracts and options can help hedge against economic exposure.

Review Questions

• What is the difference between economic exposure and transaction exposure?
• How can companies manage economic exposure?
• Why does economic exposure impact a company's market value?

Related terms

Foreign Exchange Rate: The price at which one currency can be exchanged for another.

Hedging:

Financial strategies used to reduce risk associated with adverse price movements in an asset.

Transaction Exposure:

The risk associated with exchange rate fluctuations affecting short-term transactions.