Question

What is operating exposure to currency risk and why is it important?

Answer 1

Ans:- when companies operate in international markets, they mainly deal with three types of currency risks transaction exposure, economic exposure also known as operating exposure and translation exposure.

Economic exposure is also known as operating exposure is a very important risk that the firm deals with because it affects the firm's profitability and operations. operating risks affect the firm's future cash flows and market value due to the currency fluctuation in the international markets. In other words, economic exposure is nothing but a measure of changes in the Net Present Value of the firm due to changes in the value of the currency in the International market.

For example:- If an Indian firm operates in the U.S and suppose the dollar becomes strong against rupees then it will affect the firm's profitability because the strong dollar value against the rupees will make the production cost for the company more expensive and it will decrease the overall profitability in foreign currency.

This can have a serious negative impact on the firms dealing in international markets and this risk can be long-term, Economic or operating exposure can not be easily mitigated. That's why this risk is very important for any firm to deal with when they operate in the international market.