Question

Any restructuring of operations that ____ the difference between a foreign currency's inflows and outflows may ____ economic exposure. a. reduces; increase b. increases; reduce c. reduces; reduce d. A and B e. none of these

Answer 1

Answer:

The correct answer is c. reduces; reduce.

Explanation:

Economic exposure is a type of exposure to exchange rate risk caused by the effect of unexpected currency fluctuations on a company's cash flows, foreign investment, and future earnings.

Economic exposure, also known as operating exposure, can have a substantial impact on a company's market value, as it has far-reaching effects and is long-term in nature. Companies can protect themselves against unexpected currency fluctuations by investing in currency markets (FX).

Unlike transaction exposure and conversion exposure (the other two types of currency exposure), economic exposure is difficult to measure accurately and therefore difficult to hedge. Economic exposure is also relatively difficult to hedge because it faces unexpected changes in exchange rates, unlike expected changes in exchange rates, which form the basis of companies' budget forecasts.