what is economic exposure 
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 also known as operating exposure can have a substantial impact on a company s market value since it has far reaching effects and is long term in nature companies can hedge against unexpected currency fluctuations by investing in foreign exchange fx trading understanding economic exposurethe degree of economic exposure is directly proportional to currency volatility economic exposure increases as foreign exchange volatility increases and decreases as it falls 1economic exposure is obviously greater for multinational companies that have numerous subsidiaries overseas and a huge number of transactions involving foreign currencies however increasing globalization has made economic exposure a source of greater risk for all companies and consumers economic exposure can arise for any company regardless of its size and even if it only operates in domestic markets mitigating economic exposureeconomic exposure can be mitigated either through operational strategies or currency risk mitigation strategies operational strategies involve diversification of production facilities end product markets and financing sources since currency effects may offset each other to some extent if a number of different currencies are involved currency risk mitigation strategies involve matching currency flows risk sharing agreements and currency swaps matching currency flow means matching cash outflows and inflows with the same currency such as doing as much business as possible in one currency including borrowings currency swaps allow two companies to effectively borrow each other s currencies for a period of time example of economic exposureassume that a large u s company that earns approximately 50 of its revenue from overseas markets has factored in a gradual decline of the u s dollar against major global currencies say 2 per annum into its operating forecasts for the next few years if the dollar appreciates instead of weakening gradually in the years ahead this would represent economic exposure for the company the dollar s strength means that the 50 of revenues and cash flows the company receives from overseas will be lower when converted back into dollars which will have a negative effect on its profitability and valuation the company would have to employ currency risk mitigation strategies to hedge against any adverse moves from an incorrect calculation it might employ a small fx trading desk within the firm to help reduce exposure to adverse currency fluctuations 