Operating Exposure – Market Share & Competitiveness Risk

This is the "Silent Killer". Unlike Transaction exposure (which is one deal), Operating Exposure kills the entire business model.

1. Meaning (Economic Exposure)

It measures the change in the Present Value of Future Operating Cash Flows due to exchange rate changes.

• Focus: Long Term.
• Mechanism: Price Elasticity of Demand.

2. Case Study: The iPhone Effect

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3. How to Manage It? (Strategic Hedging)

You cannot manage this with Forward Contracts (can't hedge 5 years of sales). You need Strategic Moves.

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4. Exam Notes: Writing the Answer

Question: "Explain Economic/Operating Exposure. How is it managed?" (10 Marks)

Answering Strategy:

1. Define: "Change in PV of future cash flows...".
2. Distinguish: Explicitly say it is distinct from Transaction Exposure using the "Time Horizon" argument.
3. Strategies:
   • Natural Hedge: Explain "Matching Currency of Cost and Revenue" (Producing locally).
   • Differentiation: Reduce price sensitivity by Brand building.

Summary

• Strategic: This is a CEO-level problem, not a Treasurer-level problem.
• Impact: It affects the "Real" value of the firm, not just the "Book" value.

Quiz Time! 🎯

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