Question

Explain what a cash flow exposure or a fair value exposure is.

Answer 1

Cash Flow Exposure the effect of currency changes on the present value of future cash flows generated by a company's domestic and foreign operations also called economic exposure .

Examples

1 When a company  selects the budget rate at which to convert the forecasted foreign expenses into foreign currency , the exposure clock starts. Any currency rate changes between the budget rate and the current rate represents currency risk until the receivable is paid and converted to foreign currency

2 When companies fix the price of their goods and services in one currency and source those goods in another currency.

Fair value exposures arise from existing assets and liabilities, including firm commitments. Fixed rate financial assets and liabilities, for example, have a fair value exposure to changes in market rates of interest and changes in credit quality. Non-financial assets have a fair value exposure to changes in their market price e.g. a commodity price. Some assets and liabilities have fair value exposures arising from more than one type of risk e.g. interest rate, credit, foreign currency risk.