Economic exposure refers to how sensitive a firm's performance and value are to fluctuations in exchange rates. It measures the impact of unexpected exchange rate changes on a firm's expected future cash flows. Managing economic exposure is more important for a firm's long-term success than transaction or translation exposure since it takes into account how exchange rates affect future revenues and costs. Economic exposure can be measured by forecasting how exchange rates will impact items on the income statement and assessing the overall effect on the firm's value. Firms manage economic exposure through initiatives like market selection, product strategy, input mix, and plant location.

1. ECONOMIC
EXPOSURE

2. EXPOSURE
It is the measure of the sensitivity of a firm’s performance to fluctuations in the relevant
risk factor i.e. whether or not a certain risk factor affects a firms performance.
ECONOMIC EXPOSURE
 Refers to the extend to which the economic value of a company can decline due to
changes in exchange rate.
 It is the overall impact of exchange rate changes on the value of the firm.
 It measures the impact of an actual coversion on the expected future cash flows as a
result of an unexpected change in exchange rates.
 Managing economic exposure is very important for the long run health of an
organization than managing changes caused by transaction or translation exposure.

3. • Operating exposure, also called economic exposure, competitive exposure,
and even strategic exposure on occasion, measures any change in the
present value of a firm resulting from changes in future operating cash flows
caused by an unexpected change in exchange rates.
• Measuring the operating exposure of a firm requires forecasting and
analyzing all the firm’s future individual transaction exposures together with
the future exposures of all the firm’s competitors and potential competitors
worldwide.

4. E.g.:-
A British exporter who operates in the Indian market can increase in market share merely by
reducing the Indian prices of his products if the Indian rupee becomes strong against the UK
pound. Conversely, if the Indian rupee weakens against the British pound, the Indian
company which is a potential competitor on the British company can profit indirectly from
currency losses of the British company. Thus, even though the Indian company is not
directly exporting, yet competition in the business can be generated on account of the
strength of the currency of competitors.

5. TRANSLATION EXPOSURES
Accounting based on changes in
consolidated financial statements
caused by a change in exchange
rates.
ECONOMIC EXPOSURE
Change in expected cash flows
arising because of an unexpected
change in exchange rates.
TRANSACTION EXPOSURES
Impact of setting an outstanding obligations entered
into before change in exchange rates but to be settled
after change in exchange rates.
COMPARISON BETWEEN THE EXPOSURES

6. DIFFERENCE BETWEEN TRANSACTION AND
ECONOMIC EXPOSURE
Transaction Exposure
 Cash flow losses due to an exchange
rate change are easy to compute
.Simple financial accounting techniques
can be used to compute losses
 Firms generally have some policies to
cope with the exposure
 Avoidance sometimes requires third
party cooperation.
 Source of uncertainty -future exchange
rate
Economic Exposure
 Opportunity losses caused by an exchange
rate change are difficult to compute. A good
variance accounting is needed to isolate the
effect of exchange rate change on sales
volume, costs and profit margins.
 Firms generally do not have policies to cope
with economic exposure.
 Avoidance requires good strategic
planning(choice of markets, products).
 Sources of uncertainty -future exchange
rates and its effect on sales, price and costs.

7. MEASURING ECONOMIC EXPOSURE
• Classify the cash flows into different items on the income statement and predict movement of each
item in the income statement based on a forecast of exchange rates
• This will help in developing an alternative exchange rate scenario and the forecasts for the income
statement can be revised.

8. MANAGING ECONOMIC EXPOSURE
MARKETING INITATIVES
• Market selection
• Product strategy
• Promotional strategy
PRODUCTION INITIATIVES
• Input mix
• Plant location
• Raising productivity

9. THANK YOU