MEASURING ECONOMIC EXPOSURE -

The degree of economic exposure to exchange rate fluctuations is significantly higher for a firm involved in international business than for a purely domestic firm. Assessing the economic exposure of an MNC is difficult due to the complex interaction of funds that flow into, out of and within the MNC. Yet, economic exposure is crucial to operations of the firm in the long run. If an MNC has subsidiaries around the world, each subsidiary will be affected differently by fluctuations in currencies. Thus, attempts by the MNC to measure its economic exposure would be extremely complex.

ONE method of measuring an MNC’s economic exposure is to classify the cash flows into different items on the income statement & predict movement of each item in the income statement based on a forecast of exchange rates. This will help in developing an alternative exchange rate scenario & the forecasts for the income statement items can be revised. By assessing how the earnings forecast in the income statement has changed in response to alternative exchange rate scenario, the firm can assess the influence of currency movements on earnings and cash flows.