An economic exposure ________.
A) occurs when reporting systems are inadequate
B) generally takes place when foreign currencies weaken against the dollar
C) occurs when the sourcing and costs of components change as exchange rates change
D) is the same as a translation exposure

Question

Quizplus · Accepted Answer

Economic exposure refers to the risk that a firm's cash flows, profitability, and other financial metrics may be adversely affected by changes in exchange rates. This can occur, for example, if a firm sources components or raw materials from abroad and the cost of those inputs increases due to exchange rate fluctuations. Therefore, option C is the correct answer. Option A is incorrect because inadequate reporting systems do not necessarily result in economic exposure. Option B is incorrect because a weak foreign currency can actually benefit a firm that has foreign sales or assets. Option D is incorrect because translation exposure specifically relates to the impact of exchange rate changes on the value of an international subsidiary's assets and liabilities when reported in the parent company's currency.

An Economic Exposure ________