Compare and contrast transaction exposure and economic exposure?

Answer 1

transaction exposure relates to the risk of exchange rate movements relating to current investments. In other words investments which are already contracted for. Economic exposure relates to the risk associated with exchange rate movements which may affect future cash flows.

Answer 2

Both exposures deal with changes in expected cash flows. Transaction exposure deals with changes in near-term

cash flows that have already been contracted for (such as foreign currency accounts receivable, Accounts Payable,

and other debts). Operating exposure deals with changes in long-term cash flows that have not been contracted

for but would be expected in the normal course of future business. One might view operating exposure as

"anticipated future transactions exposure," although the concept is broader because the impact of the exposure

might be through sales volume or operating cost changes.

Given a known exchange rate change, the cash flow impact of transaction exposure can be measured precisely

whereas the cash flow impact of operating exposure remains a conjecture about the future.

Answer 3

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