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Glossary

Navigate the complex world of currency management with our comprehensive dictionary of financial terms and definitions.

Economic Exposure

Economic exposure to foreign exchange risk is the extent to which the present value of a firm’s expected future cash flows is affected by exchange rate changes. Economic exposure comprises two cash flow exposures: transaction exposure and operating exposure. Transaction exposure reflects future FX-denominated cash flows that result from already existing, contractually binding, sales or purchase orders (SO/PO), whether or not the corresponding receivables/payables have been created. Operating exposure measures the extent to which currency fluctuations alter the firm’s future operating cash flows, that is, its future revenues and costs. Operating exposure may arise even in a firm with cash flows denominated solely in its home currency, if its costs and/or price competitiveness are affected by FX fluctuations.