Who can use the detailed method for determining economicexposure and who can use the regression...

Who can use the detailed method for determining economic exposure and who can use the regression based method for determining economic exposure? Why?

Expert Solution

Abstract

Economic exposure, also known as operating exposure refers to an effect caused on a company’s cash flows due to unexpected currency rate fluctuations.

Economic exposures are long-term in nature and have a substantial impact on a company’s market value.

The regression coefficient is a measure of economic exposure and measures the sensitivity of the asset's dollar value to the exchange rate

The sensitivity of value of the fimi's cash flows due to exchange rate movements is referred to as transaction exposure .

The sensitivity of the (amount of) firm's cash flows to exchange rate movements is referred to as economic exposure
An exporting firm that invoices in foreign currencies is exposed to transaction exposure, because if the value of the foreign currency falls in exchange rate lovements.

Then the exporting firm will receive less in terms in its home currency for any given amount of foreign currency cash flows.

If on the other hand. the exporting firm starts to invoice in the home currency, it would get nd of transaction exposure_ However, it will now be subject to economic exposure.

This is because if the value of foreign currency falls, the buyers in the foreign countries will now have to pay more in terms of their own currency to import any given quantity of products.

This can induce these buyers to source the product from the suppliers in their own country, which will cause the exporting firm's cash flows to fall.

An awareness of the impact of economic exposure can help firms take steps to mitigate this risk. Investors should identify stocks and companies that have major exposures and make better investment choices during times when exchange rate volatility

Therefore the conclusion is - Yes the firm can use the detailed method for determining economic exposure and can use the regression based method for determining economic exposure

Rahul Sunny answered 2 years ago

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