What is Economic Exposure?
Economic exposure is the risk that a company's cash flow, foreign investments, and earnings may suffer as a result of fluctuating foreign currency exchange rates.
How Does Economic Exposure Work?
The extent to which a company may be affected by economic exposure depends very much on the company's specific industry and business interests.
Say Company XYZ is a business importing goods from Japan to sell in the United States. If the Japanese yen were gain against the dollar, it would make it more expensive for Company XYZ to purchase goods for import, thereby hurting its operations.
In order to reduce this risk, the company could hedge its business by using the foreign exchange markets (forex), where it can make investments that increase in value when the yen rises.
Why Does Economic Exposure Matter?
Economic exposure matters most to companies conducting foreign business, as it directly impacts their operations. However, with increased global trade, the effects of economic exposure are felt by all consumers as it can impact the prices paid for foreign goods.