International Finance - USA Foreign Exchange Exposure- Economic, Translation, Transaction exposure
Please be as detailed as possible:
A) Define foreign exchange exposure for a firm. Is a purely domestic firm subject to some foreign exchange exposure? If yes, why?
B) What are the key differences among economic exposure, transaction exposure, and translation exposure?© SolutionLibrary Inc. solutionlibary.com 9836dcf9d7 https://solutionlibrary.com/business/finance/international-finance-usa-foreign-exchange-exposure-economic-translation-transaction-exposure-31c
...ion exposure). While the transaction exposure is specific to a transaction economic exposure is much broader in nature. Suppose a US firm decides to set up a car manufacturing facility in Europe. Now the exchange rate fluctuations may significantly alter the cost of a firm's inputs and the prices of its output and thereby influence its competitive position substantially. This is economic exposure.
Transaction exposure: In a firm some of the assets and liabilities may be denominated in foreign currency. For example the loans of a US firm may be denominated in DM or £ or Yen depending on from where they have been borrowed. The foreign currency value of these items are contractually fixed that is they do not vary with exchange rate. The transaction exposure comes into picture when the asset or liability has to be liquidated. For example when the one million £ loan was contracted by the US firm the $/£ exchange rate was 1.5 $/£. Thus the liability of principal payment ...