Abstract
While economic exposure is an important issue for the management of a multinational financial system, few models have been developed to measure this risk. The major challenge to measuring economic exposure is the interdependence of affiliate performances vis‐a‐vis changes in currency values. In this paper, a model has been developed that not only measures the sensitivity of the value of the firm to changes in currency values, but also recognizes the interdependence among the affiliates. The model takes a global view of the problem and also leads to guidelines for managing economic exposure. While the discussion focuses on geographically diversified multinational companies, the content of the paper is equally applicable to domestic companies.
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