Economic exposure is an exposure to fluctuating exchange rates, which affects a company's earnings, cash flow and foreign investments. The extent to which a company is affected by economic exposure depends on the specific characteristics of the company and its industry. Most large companies attempt to minimize the risk of fluctuating exchange rates by hedging with positions in the forex market. Companies that do a lot of business in many countries, such as import/export companies, are at particular risk for economic exposure. Many multination corporations must ensure that they can weather economic exposure by hedging their current positions. With the recent drop in value of the Euro, many companies are rushing to ensure they are hedged against any future fluctuations. These fluctuations can greatly affect a company’s quarterly or yearly earnings. If a United States based company is heavily invested overseas in Europe or Asia, they rely on the currency exchange rates to benefit them, when it comes time to report earnings. However, if a company is doing a lot of business in London, and the Pound suddenly plummets in value against the Dollar, then the company will experience a great decrease in revenue and maybe even a loss. Economic exposure is more of a longer term effect, while transactional exposure is most short term, dealing with currency exchanges within a matter or days, weeks, or months. Transactional exposure is the risk that a company's equities, assets, liabilities or income will change in value as a result of exchange rate changes. This occurs when a firm denominates a portion of its equities, assets, liabilities or income in a foreign currency. Companies use various methods to isolate these types of risks, such as consolidation techniques for the firm's financial statements and the use of the most effective cost accounting evaluation procedures. In many cases, this exposure will be recorded in the financial statements as an exchange rate gain (or loss).

Works Cited

1. WWW.INVESTOPEDIA.COM. 15 Sept. 2006. 12 May 2009 <http://www.investopedia.com/terms/e/economicexposure.asp>.