Economic Exposure and Accounting Exposure

Abstract

Changes or fluctuations in exchange rates have effect on cash flows/value of firms engaged in international activities as well as firms of domestic nature. The value of a pure domestic firm may be affected by economic exposure through foreign competition in the domestic and local market. Firms with more foreign costs than foreign revenues will be unfavourably affected by stronger foreign currencies; while firms with more foreign revenues than foreign costs will be unfavourably affected by weaker foreign currencies. Table 17.1 describes the effects on firms’ activity of currency appreciation/depreciation, which affect the present value of future cash flows and firm value. Currency depreciation or appreciation is in real terms when relevant, though depreciation or appreciation in terms of nominal exchange rates can also be, and in many cases is, real. However, nominal depreciation/appreciation matters where cash flows are bound by contractual agreements.