ABSTRACT
The definitions of foreign exchange exposure and risk in Chapter 9 relate to the true economic effects of exchange rates, and indeed, exposure and risk as we have defined them are often called economic exposure and economic risk. While in principle, economic effects should be apparent in companies’ accounts, in reality the effects of exchange rates that appear in financial statements rarely if ever correspond with the economic measures. The effect of exchange rates which appears in financial statements is called accounting exposure. In this chapter we trace through the ways different accounting principles measure the effects of exchange rates, and how these measures compare to what we refer to as real changes in exchange rates, where by ‘‘real changes’’ we mean true economic effects of exchange rates. We begin with an outline of accounting principles that have been or that are currently being used to record international financial transactions.
