· Exposure Netting

Exposure netting involves offsetting exposures in one currency with exposures in the same or another currency, where exchange rates are expected to move in such a way that losses(gains) on the first exposed position should be offset by gains (losses ) on the second currency exposure.

The assumption underlying exposure netting is that the net gain or loss on the entire exposure portfolio is what matters, rather than the gain or loss on any individual monetary unit.

· ECONOMIC EXPOSURE (MONETARY)

It refers to the level to which a firm’s present value of future cash flows can be influenced by exchange rate fluctuations. It is a more managerial concept than an accounting concept. A company can have an economic exposure to say Pound/Rupee rates even if it does not have any transaction or translation exposure in the British currency. This situation would arise when the company’s competition are using British imports .If the Pound weakens, the company loses its competitiveness or vice versa if the Pound becomes strong.

Economic exposure to an exchange rate is the risk that a variation in the rate will affect the company’s competitive position in the market and hence its profits. Further, it affects the profitability of the company over a longer time span than transaction or translation exposure.

Under the Indian exchange control, economic exposure cannot be hedged while both transaction & translation exposure can be hedged.

Economic exposure measures the impact of an actual conversion on the expected future cash flows as a result of an unexpected change in exchange rates. A MNC may have established its subsidiary in a country with price stability, favorable balance of payments, low rates of taxation & readily available funds. However, if the economic situation of the country were to deteriorate, these positive aspects may get reduced over time & the local currency will depreciate. The subsidiary is likely to face immediate problems if it has to pay its imports in hard currencies & in case it has borrowed from abroad.