Chapter_12 - Chapter Outline Three Types of Exposure How to...

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Chapter Outline Three Types of Exposure How to Measure Economic Exposure Operating Exposure: Definition An Illustration of Operating Exposure Determinants of Operating Exposure Managing Operating Exposure
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Economic Exposure Changes in exchange rates can affect not only firms that are directly engaged in international trade but also purely domestic firms. Consider a U.S. bicycle manufacturer who sources and sells only in the U.S. Since the firm’s product competes against imported bicycles it is subject to foreign exchange exposure.
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Economic Exposure Exchange risk as applied to the firm’s competitive position. Transaction Exposure Exchange rate risk as applied to the firm’s home currency cash flows. The subject of Chapter 13. Translation Exposure Exchange rate risk as applied to the firm’s consolidated financial statements. The subject Three Types of Exposure
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Economic Exposure Exchange rate risk as applied to the firm’s competitive position. Any anticipated changes in the exchange rates would have been already discounted and reflected in the firm’s value. Economic exposure can be defined as the extent to which the value of the firm would be affected by unanticipated changes in exchange
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Transaction Exposure This is the subject of Chapter 13. Defined as the sensitivity of “realized” domestic currency values of the firm’s contractual cash flows denominated in foreign currencies to unexpected exchange rate changes. Transaction exposure arises from fixed-price contracting in a world of constantly changing exchange rates.
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Translation Exposure The subject of Chapter 14. Exchange rate risk as applied to the firm’s consolidated financial statements.
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Chapter_12 - Chapter Outline Three Types of Exposure How to...

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