Economic exposure
How economic exposure can be defined in order to exchange the risk?
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Economic exposure is defined as the possibility that the firm’s cash flows and therefore its market value can be affected through the unexpected exchange rate changes.
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Presently, spot exchange rate is $1.50/£ and three-month forward exchange rate is $1.52/£. Three-month interest rate is 8.0% per annum within the U.S. and 5.8% per annum within the U.K. Suppose that you can borrow as much as $1,500,000 or £1,000,000.
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