ABSTRACT
Even though foreign exchange (forex) risk and exposure have been central issues of international financial management for many years, considerable confusion remains about what exactly they are and how to measure them. For example, it is not uncommon to hear the term “foreign exchange exposure” used interchangeably with the term “foreign exchange risk” when in fact exposure and risk are conceptually and even dimensionally completely different. (As we shall explain, foreign exchange risk is related to the variability of domestic currency values of assets or liabilities due to unanticipated changes in exchange rates, whereas foreign exchange exposure is the amount that is at risk.) This chapter is devoted to clarifying the nature, and methods of measurement, of risk and exposure, as well as to explaining the factors contributing to them. Several subsequent chapters deal with the management of risk and exposure.
