<P> A firm has economic exposure (also known as forecast risk) to the degree that its market value is influenced by unexpected exchange rate fluctuations . Such exchange rate adjustments can severely affect the firm's market share position with regards to its competitors, the firm's future cash flows, and ultimately the firm's value . Economic exposure can affect the present value of future cash flows . Any transaction that exposes the firm to foreign exchange risk also exposes the firm economically, but economic exposure can be caused by other business activities and investments which may not be mere international transactions, such as future cash flows from fixed assets . A shift in exchange rates that influences the demand for a good in some country would also be an economic exposure for a firm that sells that good . Economic Exposures cannot be hedged as well due to limited data, and it is costly and time - consuming . Economic Exposures can be managed by, product differention, pricing, branding, outsourcing, </P> <P> A firm's translation exposure is the extent to which its financial reporting is affected by exchange rate movements . As all firms generally must prepare consolidated financial statements for reporting purposes, the consolidation process for multinationals entails translating foreign assets and liabilities or the financial statements of foreign subsidiaries from foreign to domestic currency . While translation exposure may not affect a firm's cash flows, it could have a significant impact on a firm's reported earnings and therefore its stock price . Translation exposure is distinguished from transaction risk as a result of income and losses from various types of risk having different accounting treatments . </P> <P> A firm has contingent exposure when bidding for foreign projects or negotiating other contracts or foreign direct investments . Such an exposure arises from the potential for a firm to suddenly face a transactional or economic foreign exchange risk, contingent on the outcome of some contract or negotiation . For example, a firm could be waiting for a project bid to be accepted by a foreign business or government that if accepted would result in an immediate receivable . While waiting, the firm faces a contingent exposure from the uncertainty as to whether or not that receivable will happen . If the bid is accepted and a receivable is paid the firm then faces a transaction exposure, so a firm may prefer to manage contingent exposures . </P> <P> If foreign exchanges market are efficient such that purchasing power parity, interest rate parity, and the international Fisher effect hold true, a firm or investor needn't protect against foreign exchange risk due to an indifference toward international investment decisions . A deviation from one or more of the three international parity conditions generally needs to occur for an exposure to foreign exchange risk . </P>

Foreign exchange risk is the risk that a person or business will not be able to exchange currencies