Traditional Approaches to Measuring Macroeconomic Exposure
Traditional Approaches to Measuring Macroeconomic Exposure
Traditional, as well as more recent concepts of exposure to exchange rates, interest rates, and inflation are reviewed and compared in this chapter. All exposure measures can be interpreted as coefficients of sensitivity but the measures differ in terms of coverage and some are accounting based with little direct economic relevance. In particular, transaction and translation exposures are often narrowly defined based on accounting information. Contractual exposures are distinguished from non-contractual exposures that cannot be observed from contractual commitments. Duration measures of interest rate exposures are also partial in the sense that they focus on financial positions. It is argued that commercial cash flow exposures are useful measures for risk management, since they can be used as benchmarks for calculation of financial positions that would reduce exposure. Purchasing power parity and interest rate parity conditions are discussed in an Appendix.
Keywords: transaction exposure, translation exposure, economic exposure, contractual exposure, commercial cash flow exposure, accounting exposure, interest rate risk, inflation risk, Purchasing Power Parity, International Fisher Parity
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