Operating exposure is the degree of risk that a company is exposed to when there is some type of change in varying currency values that are relevant to the operation of the company. The shifts in exchange rates may affect the value of certain assets of the business and thus have an impact on the overall profitability of the company. For this reason, the idea is to position the company and its assets so that any change in the exchange rate is likely to exhibit either a favorable change or very little change at all.
For most companies, it is the non-monetary assets that are usually affected by operating exposure. This includes assets like equipment and facilities. Shifts in the exchange rate can cause the value of these assets to increase or decrease over time, which may in turn cause the operating cash flows of the business to be affected in some manner. If the operating exposure leads to higher expenses for the operation, this can lead to smaller profits and a reduced flow of cash into the business, making it harder to remain competitive.
The same general principal of operating exposure is true with investing in the foreign exchange market. Investors want to make sure that the trading they conduct on this market results in the creation of a return. In order to accomplish this goal, investors must project any possible events that are likely to lead to a negative state of operating exposure, causing their holdings to lose value in relation to the value of other currencies. The investor who is able to accurately identify indicators of this type stands a better chance of selling a currency while it is doing well, and replace it with a currency that carries a lower amount of operating exposure.
It is important to remember that operating exposure is a projection of what is likely to come in the future. For this reason, assessing the rate of exposure is a constant process. Should unforeseen events take place that have the potential to trigger a drastic shift in the prospective rate of exposure, the need to revise previous projections becomes real and immediate. Using this type of assessment with prudence can help a business or an investor minimize losses and also aid in creating a position for growth at some point in the future. Failure to do so can mean a loss of value to key assets, and possibly hamper the productivity of a business for many years to come.
