Examine the importance for business financial leaders to recognize the firm’s foreign currency exposure. Solution Foreign currency exposure means the financial risk that exists when a financial transaction is denominated in a currency other than that of the base currency of the firm. It is important for the business financial leaders to recognize the firm’s foreign currency exposure so as to see the possible opportunities of arbitrage by holding one currency and releasing other. If a firm has to involve in the international trade (exports / imports) then it should be having an idea about the advantages and disadvantages of functioning in the currencies of the particular markets. Foreign exchange exposure is classified into three types viz. Transaction, Translation and Economic Exposure. Transaction Exposure also referred to as conversion exposure or cash flow exposure. It concerns the actual cash flows involved in setting transactions denominated in a foreign currency. These could include : sales receipts, payments for goods and services, receipt and/or payment of dividends, servicing loan arrangements as regards interest and capital . Translation exposure is also referred to as accounting exposure or balance sheet exposure. The restatement of foreign currency financial statements in terms of a reporting currency is termed translation. The exposure arises from the periodic need to report consolidated worldwide operations of a group in one reporting currency and to give some indication of the financial position of that group at those times in that currency. Economic exposure or operational exposure moves outside of the accounting context and has to do with the strategic evaluation of foreign transactions and relationships. It concerns the implications of any changes in future cash flows which may arise on particular transactions of an enterprise because of changes in exchange rates, or on its operating position within its chosen markets. Its determination requires an understanding of the structure of the markets in which an enterprise and its competitors obtain capital, labour, materials, services and customers. Identification of this exposure focuses attention on that component of an enterprise\'s value that is dependent on or vulnerable to future exchange rate movements. This has bearing on a corporation\'s commitment, competitiveness and viability in its involvement in both foreign and domestic markets. Thus, economic exposure refers to the possibility that the value of the enterprise, defined as the net present value of future after tax cash flows, will change when exchange rates change. .

1. Examine the importance for business financial leaders to recognize the firm’s foreign
currency exposure.
Solution
Foreign currency exposure means the financial risk that exists when a financial transaction is
denominated in a currency other than that of the base currency of the firm.
It is important for the business financial leaders to recognize the firm’s foreign currency
exposure so as to see the possible opportunities of arbitrage by holding one currency and
releasing other.
If a firm has to involve in the international trade (exports / imports) then it should be having an
idea about the advantages and disadvantages of functioning in the currencies of the particular
markets.
Foreign exchange exposure is classified into three types viz. Transaction, Translation and
Economic Exposure.
Transaction Exposure also referred to as conversion exposure or cash flow exposure. It concerns
the actual cash flows involved in setting transactions denominated in a foreign currency. These
could include : sales receipts, payments for goods and services, receipt and/or payment of
dividends, servicing loan arrangements as regards interest and capital .
Translation exposure is also referred to as accounting exposure or balance sheet exposure. The
restatement of foreign currency financial statements in terms of a reporting currency is termed
translation. The exposure arises from the periodic need to report consolidated worldwide
operations of a group in one reporting currency and to give some indication of the financial
position of that group at those times in that currency.
Economic exposure or operational exposure moves outside of the accounting context and has to
do with the strategic evaluation of foreign transactions and relationships. It concerns the
implications of any changes in future cash flows which may arise on particular transactions of an
enterprise because of changes in exchange rates, or on its operating position within its chosen
markets. Its determination requires an understanding of the structure of the markets in which an
enterprise and its competitors obtain capital, labour, materials, services and customers.

2. Identification of this exposure focuses attention on that component of an enterprise's value that
is dependent on or vulnerable to future exchange rate movements. This has bearing on a
corporation's commitment, competitiveness and viability in its involvement in both foreign and
domestic markets. Thus, economic exposure refers to the possibility that the value of the
enterprise, defined as the net present value of future after tax cash flows, will change when
exchange rates change.