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Discuss some examples of economic and transaction exposures for international firms. How do firms mitigate these...

Discuss some examples of economic and transaction exposures for international firms. How do firms mitigate these risks?

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Answer #1

Transaction exposure occurs when companies buy or sell in different currencies. It occurs when there is international trade .There is actual cash outflow or inflow. Hence there is actual profit or loss.
Example. If a US based company buys a product from India and the payment is to be made in Indian Rupee. Then the entire risk of currency exchange lies with the US company if the product is sold in terms of Rupee
Hedging towards forwards contracts help to mitigate transaction exposure.

Economic exposure is the long term impact of cash flows due to economic issues in a country. It is also known as Operating exposure . Economic exposure is difficult to predict and hedging against it is difficult.
Example:Due to economic factors if the US GDP continuously increases then the US currency appreciates. This puts foreign companies in US at higher exchange rate risk.
It is mitigated through different hedging options and by increasing efficiency of operation.

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