Currency risk exposure can be categorized as:

Question

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Currency risk exposure can be categorized into three main types:

1. Transaction exposure - the risk of fluctuations in exchange rates on future transactions that have already been agreed upon but not yet settled. For example, if a company has agreed to purchase goods from a foreign supplier and the exchange rate changes before payment is made, the cost of those goods will be affected.

2. Economic exposure - the risk of fluctuations in exchange rates on future cash flows from foreign operations. This includes potential changes in revenues, expenses, and asset values as a result of currency fluctuations.

3. Translation exposure - the risk of fluctuations in exchange rates on the value of assets and liabilities denominated in foreign currencies when those values are translated into the home currency. This affects companies that operate in multiple countries and have to consolidate their financial statements.

Therefore, all three categories contribute to a company's currency risk exposure.

Currency Risk Exposure Can Be Categorized As