Transaction Exposure VS Economic Exposure

‘Transaction Exposure’ is a risk which is faced by the organizations which are involved in international trade especially when they enter into the financial obligations. The risk which is faced by the companies is about the changes occurring in the currency exchange rates after they have entered into trade obligations in the international market. Many companies which face such a situation adopt hedging strategy which allows them to get locked in an exchange rate by using forward rates to evade the exposure of companies to risk. ‘Transaction Exposure’ is also called ‘Contractual Exposure’ which is about the sensitivity of the currency value of assets and liabilities that get liquidated considering the changes occurring in the exchange rates of the importing, exporting and the firms dealing in import substituting. The companies at large negotiate their contracts on set prices and dates in the foreign exchange market which is highly volatile and ever fluctuating so they are at higher risk of facing the changes occurring in the exchange rates of local and foreign currencies.

‘Economic Exposure’ is an exposure which effects an organization’s cash flow, investments and earnings when it is faced with fluctuating exchange rates. An organization is effected due to economic exposure considering the nature of its industry and its characteristics. Many companies which are faced with the fluctuations in exchange rates try to minimize the risk of economic exposure by hedging positions in the forex markets. Those companies which are involved primarily on imports and exports with foreign countries are at highest risk of economic exposure. Economic Exposure is about the sensitivity of the currency value of assets, liabilities and future operating incomes to the changes occurring in the exchange rates. It can also be called the anticipated future transactions exposure which can be through the operating cost changes and the sales volume. Economic exposure can affect the market position and market share of a firm as compared to its competitors. In addition, it also affects the firm value and firm’s future cash flows.

Both of the exposures that are transaction and economic exposures deal with the changes occurring in the expected cash flows of the companies. The transaction exposure deals with the changes occurring in short term cash flows that have already been contracted. Whereas, the economic exposure deals with the changes occurring in the long term cash flows that have not been contracted but are expected in the future. The impact of the transaction exposure can be measured precisely dealing with the cash flows if the exchange rate is known. On the other hand, the impact of the economic exposure dealing with the cash flows remains a speculation considering the future. It can affect the present value of the future cash flows of a firm. It exposes the firm to the foreign exchange risk and also to economical risk which may alter due to fluctuations in the foreign exchange market. Apart from these aspects, economic exposure can be caused due to the future cash flows from the fixed assets of the firm.

 

Related Economics Topics

This entry was posted in Economics. Bookmark the permalink.

Comments / Questions

No Comments or Questions yet be the first to comment.



Sorry, the comment form is closed at this time.


Possible Questions from this Topic :

1- What is Transaction Exposure VS Economic Exposure?
2- Why is Transaction Exposure VS Economic Exposure?
3- Where is Transaction Exposure VS Economic Exposure used in Economics ?
4- Explain the theory of Transaction Exposure VS Economic Exposure ?

You can find the Answers in the article above. (Questions written above are auto generated so English grammatical or structural errors are possible)