Economic Exposure

11 Pages Posted: 5 Apr 2010

See all articles by Marc L. Lipson

Marc L. Lipson

University of Virginia - Darden School of Business

Abstract

This note describes the economic exposure that arises from changes in currency exchange rates. After illustrating the economic impact of exchange rate changes, including a discussion of real exchange rate changes, the note provides a summary of methods used to manage exposure. The use of forward rates and money markets is explored in detail.

Excerpt

UVA-F-1603

Rev. Nov. 12, 2009

Economic Exposure

The term exposure refers to the extent to which a firm is affected by exchange rate changes. Exposure determines the potential magnitude of the risks that accompany currency fluctuations. A distinction is commonly drawn between accounting exposure, which refers to the changes in financial statements that occur due to currency changes, and economic exposure, which refers to real economic changes. Accounting exposure may or may not have economic consequences. Economic exposure, in turn, is commonly divided into two categories:

Operating exposure is the economic exposure created when the operations of a firm generate foreign-currency-denominated cash flows.

Transaction exposure is the economic exposure created when contractual obligations are denominated in foreign currencies.

. . .

Keywords: currency exchange rate change hedge hedging exposure operating transaction

Suggested Citation

Lipson, Marc Lars, Economic Exposure. Darden Case No. UVA-F-1603. Available at SSRN: https://ssrn.com/abstract=1583754

Marc Lars Lipson (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4837 (Phone)
434-243-5021 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lipson.htm

Register to save articles to
your library

Register

Paper statistics

Downloads
109
Abstract Views
700
rank
248,493
PlumX Metrics