Correct option is C
Statement I is correct because economic exposure (also known as operating exposure) refers to the long-term effect of changes in exchange rates on a firm's market value and future cash flows. These effects are typically unpredictable and can impact a firm’s competitiveness, pricing strategy, and overall valuation even if the firm is not directly involved in foreign transactions.
Statement II is incorrect because transaction exposure is a short-term exposure that arises from the effect of exchange rate movements on a firm’s contractual cash flows that are denominated in foreign currencies—such as receivables and payables. It does not refer to long-term cash flow exposure; that would fall under economic or translation exposure.
Information Booster:
Economic Exposure affects a firm's future operating cash flows, assets, liabilities, and market competitiveness due to exchange rate volatility.
It is broader in nature than transaction exposure and may influence long-term strategic decisions, such as market entry or product pricing.
This type of exposure is difficult to quantify and hedge, as it involves non-contractual, forecasted cash flows.
Companies mitigate economic exposure by diversifying markets, sourcing locally, or structuring operations to balance currency flows.
Unlike transaction exposure, economic exposure affects firms even when they do not directly trade in foreign currencies.
It is often assessed through sensitivity analysis and scenario planning to determine how different exchange rates impact the firm.
Industries like manufacturing and export-import businesses are more vulnerable to economic exposure due to their reliance on foreign markets.
English
10 Questions
20 Marks
12 Mins
