Can anyone please help me differentiate between translation/translation and economic exposure? I am fine with distinguishing between transaction and translation exposures, but it seems very difficult to identify economic exposure. Any help will be highly appreciated.
Economic exposure: Risk changes in FX could change demand for your products e.g. if $ weakens, imports more expensive for US firm
Transaction exposure: Specific cash flow to be received from European subsidiary in 3 months (in Euro). Risk that /Euro will change in that 3 months changing value of cash flow in .
Translation exposure appears in the process of translation financial statements on reporting (domestic) currency and possible losses which my appear in FS due to unfavorable currencies movements.
Also, if I may contribute, I think of economic exposure as any impact that economic variables may have on top line (sales growth, for instance).
This is very helpful. Thanks a lot everyone!