Economic exposure

Economic exposure is the extent to which a firm’s future international earning power is affected by changes in exchange rates. Economic exposure is concerned with the long-run effect to changes in exchange rates on future prices, sales and costs. This is distinct from transaction exposure which is concerned with the effect of exchange rate changes on individual transactions, most of which are short-term affairs that will be executed with in few weeks or months. Consider the effect of the wide swings in the value of the dollar on many U.S firms’ international competitiveness during the 19080s. The repaid rise on the value of the dollar on the foreign exchange market in the early 1980s hurt the price rise in the value of the dollar on the foreign exchange market. U.S manufacturers that relied heavily on exports saw their export volume and world market share plunge. The reverse phenomenon occurred in the following decade when the dollar declined against most major currencies. The fall in the value of the dollar between 1985 and 1995 increased the price competitiveness of U.S manufactures in world markets on world markets and helped produce an export boom in the U.S