Definition: The Operating Exposure refers to the extent to which the firm’s future cash flows gets affected due to the change in the foreign exchange rates along with the price changes. In other words, a risk that firm’s revenue will be adversely affected due to the substantial change in the exchange rate and the inflation rate is called as operating exposure.
Operating Exposure, like transaction exposure, also involves the actual or potential gain or loss, but the latter is specific in nature and deals with a particular transaction of the firm, while the former deals with certain macro level exposure wherein not only the firm under concern gets affected but rather the whole industry observes the change with the change in the exchange rates and the inflation rate. Thus, with operating exposure, the entire economy is exposed to the foreign exchange risk.
Since, operating exposure is much broader in nature, and relates to the entire investment of the firm so with the change in the exchange rates the overall value of the firm gets altered. The firm’s value is comprised of the operating cash flows and the total assets the firm possesses.
It is quite difficult to identify operating risk, as the cash flows largely depends on the cost of firm’s inputs and the prices of its outputs which gets altered significantly with the change in the foreign exchange rates. Also, such exposure relates to the unseen challenges from the competitors, entry barriers, etc., which are subjective in nature and are interpreted differently by different experts. Thus, operating exposure influences the competitive position of the firm substantially.