company is affected by economic exposure depends on the specificcharacteristics of the company and its industry.
Most large companies attempt to minimize the risk of fluctuatingexchange rates by hedging with positions in the forex market.Companies that do a lot of business in many countries, such asimport/export companies, are at particular risk for economic liabilitiesor income in a foreign currency.exposure.
The risk that a company's equities, assets, liabilities or income willchange in value as a result of exchange rate changes. Thisoccurs when a firm denominates a portion of its equities, assets,
To explain how an MNC’s economic exposure can be hedged;and
To explain how an MNC’s translation exposure can be hedged.
The economic impact of currency exchange rates on us is complex because such changes are often linked to variability in real growth,inflation, interest rates, governmental actions, and other factors.These changes, if material, can cause us to adjust our financing and operating strategies.
Use of the Income Statement to an MNC can determine itsexposure by assessing the sensitivity of its cash inflows andoutflows to various possible exchange rate scenarios.
The MNC can then reduce its exposure by restructuring itsoperations to balance its exchange-rate-sensitive cash flows.Note that computer spreadsheets are often used to expedite theanalysis Assess Economic ExposureManagingMadison Inc.’s Economic Exposure