What refers to the potential effect on future cash flows by unanticipated exchange rate movements?

Economic exposure refers to the potential effect on a company's future cash flows that can arise from unexpected changes in exchange rates. This type of exposure captures the overall impact of currency fluctuations on a firm's market value and its ability to generate cash flows over the long term. Unlike transaction exposure, which deals with specific transactions, or translation exposure, which focuses on the accounting implications of converting foreign currency financial statements, economic exposure encompasses a broader view by analyzing how currency changes can affect competitive positioning and revenue generation across various markets.

For instance, if a company operates in multiple countries and relies on sales in foreign currencies, a depreciation of the domestic currency could enhance its competitiveness abroad, potentially leading to increased sales and cash flows. Conversely, unfavorable exchange rate movements might hinder the company's profitability in those markets. Therefore, understanding economic exposure is crucial for strategic planning and risk management in international business.