The economics of foreign exchange exposure : an Australian case study and time series extension

TL;DRAbstract

Three major conventions currently exist for organisations attempting to determine the extent of their particular exposure to foreign exchange fluctuations: translation; transaction; and, economic exposure. The first two forms of exposure (translation and transaction) can be fully hedged using differing functional currencies when conducting operations and/or derivative products. However, even with the implementation of a risk management strategy that fully hedges away translation and transaction exposure, an important element of foreign exchange exposure still remains. This residual element is economic exposure and occurs because future profits of organisations can be reliant on the level of exchange rates.The Thesis investigates the theory of economic exposure. The results of this theoretical research suggests that the extent of economic exposure depends on factors such as: the elasticity of demand for the product the organisation produces; production cost conditions; the currency rele

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