Question

State and discuss in detail, the action a firm with future expenses more sensitive than future revenue might take to reduce its economic exposure.

Answer 1

A firm with future expenses more sensitive than future revenue can take the following steps to reduce its economic exposure:

a) It can reduce procurement of inputs (e.g. raw materials) from foreign country (of such country whose exchange rate is likely to appreciate / strengthens vis-a-vis home currency)

b) In addition to point a) above the firm can reduce all such foreign exchange denominated cash-outflow activities (e.g. borrowing) from such country whose exchange rate is likely to appreciate / strengthens vis-a-vis home currency

c) to increase sales to such foreign market whose exchange rate is likely to appreciate / strengthens vis-a-vis home currency

All the above require restructuring the current operation and will take time. Both a) and b) will address expenses side of income statement and c) will help future revenue.