Economic Exposure

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’.

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