Question

Discuss the types of foriegn exchange exposures?

Answer 1

Three types of foreign exchange exposure: -

1) Transaction

2 ) Economic

3) Translation

1) A firm is known to have transaction exposure/ short-term exposure whenever it has engaged in the contractual cash flows which are subject to unexpected changes in rates due to the contract being a foreign currency.

2) A firm is known to have economic exposure/ long-term exposure when its market value is affected by the unexpected exchange rate fluctuations. these exchange rate adjustments can affect the firm’s position in regards to competitors, the firm’s future flows, and the value.

3) A firm’s translation exposure is known to the extent to that its financial reporting is impacted by the exchange rate movements.