Question

In: Finance

Define operating exposure, economic exposure, and competitive exposure. Can you provide any insights into what may...

Define operating exposure, economic exposure, and competitive exposure. Can you provide any insights into what may be behind the use of the different terms?

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Expert Solution

The operating exposure refers to the extent to which the firm's future cash flows get affected due to the change in foreign exchange rates along with the price changes. In other words risk that forms revenue will be adversely affected due to substantial change in the exchange rate and the inflation rate is called operating exposure. Operating exposure like transaction exposure also involves the actual or potential gain or loss but the latter is specific in nature and deals with particular transaction of the form by the former deals with the certain macro-level exposure wearing not only the firm under concern gets affected but rather the whole industry observe the change with the change in the exchange rate and inflation rate this with the operating exposure the entire economy is exposed to foreign exchange risk. Since operating exposure is much broader in nature and relates to entire investment of the form so with the change in the exchange rate the overall value of the firm gets altered the firm's value is comprised of the operating cash flows and the total Assets the form possesses it is quite difficult to identify operating risk as the cash flows largely depend on the cost of firms inputs and the prices of its outputs which gets altered significantly with the change in the foreign exchange rates also search exposure relate to unseen challenges from the competitors entry barriers which are subjective in the nature and are interpreted differently by different experts does operating exposure influences the competitive position of the firm substantially.

Economic exposure is a type of foreign exchange exposure caused by the effect of unexpected currency fluctuations on a company's future cash flows foreign investments and earnings. Economic exposure have a substantial impact on the company's market value since it has for reaching effects and its long-term in nature companies can hedge against unexpected currency fluctuations by investing in foreign exchange markets. Online transaction exposure in translation exposure economic exposure is difficult to measure precisely and hence challenging to hedge economic exposure is also relatively difficult to head because it deals with unexpected changes in foreign exchange rates unlike expected changes in currency rate which forms the basis of Corporate budget forecast. Economic exposure is obviously greater for multinational companies that have numerous subsidiaries Overseas and have a huge number of transactions involving foreign countries and currencies however increasing globalisation has made economic exposure a source of Greater risk for all the companies and consumers economic exposure can arise from any company regardless of its size and even if its only operates in domestic markets. Economic exposure can be mitigated either operational Strategies for currency risk mitigation strategies.

Competitive exposure explicitly captures the effects that currency fluctuations have on a company's future revenues and cost as a result of overall effect of such macroeconomic changes on the competitive position of the form it is the most crucial dimension of the currency exposure it's time horizen is longer than transactional exposure consider for exports and imports substitute it may also import a part of its raw materials components a change in the exchange rate arise to number of concerns of such a form example what will be the effect on sales volume since a part of inputs are imported material cost will increase labour cost me also increase interest cost on working capital merise exchange rate changes are usually accompanied by if if not caused by difference in inflation across countries.


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