Question

Distinguish between foreign exchange exposure and foreign exchange risk

Answer 1

Foreign exchange risk and exposure are two terms that are confused to be the same since they are often used interchangeably. However, their meanings are different in nature, though closely related. Foreign exchange risk and exposure are experienced by companies that have business operations in multiple countries. The key difference between foreign exchange risk and exposure is that foreign exchange risk is the change of value in one currency relative to another which will reduce the value of investments denominated in a foreign currency whereas foreign exchange exposure is the degree to which a company is affected by changes in exchange rates.