Cross-Currency Exposure

Summary of Cross-Currency Exposure

Obligations denominated in terms of a given currency that are not matched by equivalent revenues in terms of that currency. For example, a firm with obligations of 10 million Japanese yen but revenues of only 8 million yen are exposed to the degree that they must purchase, in the foreign exchange markets, 2 million yen. The exposure lies in the fact that the firm cannot predict what it will cost, in terms of dollars, to purchase the required two million yen when they are required at a point in the future. If the exposure can be predicted in terms of currency units and timing, the exposure can be mitigated or eliminated by means of a currency hedge. See hedging.

(Main Author: William J. Miller)