Accounting Versus Economic Exposure to Currency Risk

Abstract

Financial statements do not accurately reflect the impact of foreign exchange movements on a firm's economic value, particularly if foreign currency debt or derivatives are used to hedge long-term economic exposure. To help analysts and investors interpret financial reporting in this area, this article illustrates the divergence between a firm's accounting exposure and its economic exposure, using scenarios of domestic firms, exporters, and multinationals.

JEL Classification: M41, M44, G15