Due to globalization, companies may have exposure to foreign exchange risk, as unexpected change of exchange rate may affect the settlement of contracts and firm value. Answer the following questions related to foreign currency exposure.
List two major differences between transaction exposure and economic exposure.
List two reasons why operational hedging is better than financial hedging in the management of economic exposure.
True or false? “If a company’s revenue and costs/ expenses are in home currency, it does not have any transaction exposure or economic exposure.” Explain.