Economic Exposure arises because unexpected exchange rate changes alter the value of future revenues and costs. The unexpected exchange rates affect a company’s earnings, cash flow and foreign investments. The affection however, depends on the specific characteristics of the company and its industry. To put it briefly, economic exposure is made out of the combination of transaction exposure and operating exposure. Operating exposure itself arises because currency fluctuations alter a company’s future revenues and expenses. Large companies normally attempt to minimize the risk of fluctuating exchange rates by hedging with positions in the Foreign Exchange market. Such companies normally do export/ import business in many countries and usually face an economic exposure risk. There are six steps needed to the creation of an economic exposure strategy. The first step is to identify the exposure. We need to know that economic exposure focuses on the future impact of unexpected currency fluctuations on firm’s value. After that, we need to define the risk. If nominal rates change with an equal price change, no alteration to cash flows will be needed. However, if real rates change, it will cause relative price changes and changes in purchasing power. Then, we need to List the operating exposures, followed by measuring economic exposures. In order to measure operating exposure, it requires a longer-term perspective. For example, cost and price competitiveness could be affected by unexpected exchange rate changes. Lastly, we need to create a guideline of the strategy and methods to manage the risk. A firm is subject to economic exposure when changes in exchange rates affect the firm’s value which is measured from its future cash flows. The economic exposure of an exporting is proportional to firm’s net revenues in foreign currency. Therefore, the exporting firm can do hedging by selling foreign currency equal to the value of its net revenues in foreign currency. This will then create a form of competition between the exporting firm and local firms. In conclusion, competitiveness is one important key determination in economic exposure. Resources:“Economic Exposure.” Investopedia.com <http://www.investopedia.com>Marston, Richard. The Effects of Industry Structure on Economic Exposure. March 01, 1996.