Regarding question 5 in Chapter 16 I have

Regarding question 5 in Chapter 16, I have difficult opinion -- I believe that Economic Exposure is more accurate in describing the “true” foreign exchange exposure of a firm. “An economic measure of foreign exchange exposure captures more than the combination of effects on balance sheet items (translation exposure) and on planned transactions (transaction exposure). Economic exposure captures the entire range of effects on the future cash flows of the firms, including the effects of exchange rate changes on customers, suppliers, and competitors. Our earlier definition of exposure, Partial MV over Partial S, reflects economic exposure. We then offered a discussion of the regression approach, followed by the scenario approach. ” What do you think? Even if you have a very different opinion, if you can defend your answer in a logical way, you may still obtain full credit. I hope that my explanation makes sense to you.

Figure 18 -4 (of Mankiw: Principles of Macroeconomics, 2 E, © 2001) shows supply and demand in the market foreign-currency exchange. The demand curve slopes downward for the reason: A higher real exchange rate makes U. S. goods more expensive and reduces the quantity of dollars demanded to buy those goods. The supply curve is vertical because the quantity of dollars supplied for net foreign investment does not depend on the real exchange rate. (Net foreign investment depends on the real interest rate. When discussing the market foreign-currency exchange, we take the real interest rate and net foreign investment as given. )