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ACCA Strategic Professional · Advanced Financial Management · The use of financial derivatives to hedge against forex risk

Which situation is an example of economic exposure for a company?

A sustained fall in a foreign currency that reduces export competitiveness and lowers future cash flows is economic exposure. It concerns the long-term value of operating cash flows, unlike transaction exposure on specific receipts or translation exposure on restating accounts.

  1. AA sustained fall in a foreign currency reduces the competitiveness of the company's exports and lowers future cash flowsCorrect
  2. BA foreign currency loan is outstanding at the year end and must be retranslated
  3. CA dividend is receivable in a foreign currency in one month
  4. DA foreign subsidiary's assets are translated at the closing rate

Explanation

Economic exposure is the effect of long-term exchange rate movements on the present value of future operating cash flows and competitive position. The loan retranslation and dividend are transaction items, and subsidiary asset translation is translation exposure.

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