IF-Operating or Economic exposure

Operating or Economic exposure is the effect of exchange rate movements on the value of a firm. Unlike transaction exposure, operating exposure does not necessarily occur in the same currency in which the transaction has occurred. The exposure analyses the risk of future cash flows due to changes in exchange rates.

Management of Exchange Risks/ Exposures: -

A company’s approach to exposure is dependent on various factors such as the nature of the business, the competition or the culture of the company. A company could either choose to face a high degree of risk and expect commensurate returns, or be prepared to pay a high price for certainty. An active approach to foreign currency management involves hedging, which means taking an equal and opposite position to assets or liabilities which have an exposure. It reduces the volatility in cash flows. However, most hedging strategies are cost, either in the form of fees, premiums or the time involved. The various hedging policies usually have a 0% to 100% risk cover, based on the management’s perspective. Some companies are not only involved in hedging but will also buy and sell currencies on occasions when there are no special business need or obligations to fulfil.

Management of Operating Exposure

Operating exposure is the change in a firm’s profit margin measured in any currency, influenced by the changes in exchange rate. Prices and quantities of output and input rate are not fixed, and are subject to change, when exchange rates changes.