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Economic risk is the risk to the entity’s “present value of future operating cash flows from exchange rate movements”. It involves the effect of exchange rate changes on revenues. It arises from the entity’s decision to import from or export to a foreign country. The decision is on the price when either buying or selling at the time of transaction. If the rate is against the company, this will have an influence on decisions like where to source its raw materials or where to locate its manufacturing capacity. It is usually applied the present value of future cash flow operations of a firm’s parent company and foreign subsidiaries. However, a firm might also be exposed to economic risk even if they carry only domestic transactions.

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