International Finance – Economic Exposure

Economic exposure is the toughest to manage because it requires ascertaining future exchange rates. However, economists and investors can take the help of statistical regression equations to hedge against economic exposure. There are various techniques that companies can use to hedge against economic exposure. Five such techniques have been discussed in this chapter.

It is difficult to measure economic exposure. The company must accurately estimate cash flows and the exchange rates, as transaction exposure has the power to alter future cash flows while fluctuation of the currency exchange rates occur. When a foreign subsidiary gets positive cash flows after it corrects for the currency exchange rates, the subsidiary’s net transaction exposure is low.

Note − It is easier to estimate economic exposure when currency exchange rates display a trend, and the future cash flows are known.

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