Of all the three exposures, economic exposure is considered the most important as IL has an impact on the valuation of a firm, It is defined as the change in the value of a company that accompanies an unanticipated change in exchange rates, It is important to och that anticipated changes in exchange rates are already reflected in the market value of the company, For instance, when an Indian firm transacts business with an American firm. it has the expectation that the Indian rupee is likely or weaken the IS dollar. This weakening of the Indian rupee will not affect the market value (as Ir was anticipated, and hence already considered n valuation), However. in case the extent margin of weakening is different from expected, it will have a hearing on the marker slue. The market value may enhance if hr~ Indian rupee depreciates less than expected, In case, the Indian rupee value weakens ore than expected, it may entail erosion in the firm’s market value, In brief. the unanticipated changes in exchange rates favorable or unfavorable) are no I accounted for in valuation and, hence, cause economic exposure, Since economic exposure mantes from unanticipated changes, its measurement is not as precise and accurate as those of transaction ‘IOU translation exposures; it involves subjectivity. Shapiro’s definition of economic exposure provides the basis of its measurement. According 10 him. it is based on the extent or his the value of the Finn-as measured by ten present value of the expected future cash flows- ill change when exchange rates change’.