Economic Exposure and Accounting Exposure

This chapter examines firms’ economic exposure and accounting exposure to foreign exchange risk. Economic exposure measures how the value of a firm, the present value of all future cash flows, will be affected by changes in foreign exchange rates. While future foreign currency receivables/cash inflows or payables/cash outflows give rise to the transaction exposure of a firm to foreign exchange market uncertainties individually and respectively, these future foreign currency cash inflows and cash outflows give rise to the economic exposure of a firm to foreign exchange market uncertainties collectively and as a whole, accompanied by a changing economic environment that affects, among others, the discount rate applied to the firm. Yet, firms with economic exposure do necessarily have transaction exposure.