Exchange rate uncertainty affect firm exchange risk exposure, Financial Management

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The exchange rate uncertainty may not essentially mean that firms face exchange risk exposure. Describe why this may be the case.

Answer: A firm can comprise a natural hedging position due to, for instance, flexible sourcing capabilities, diversified markets, etc. Additionally, to the extent that the PPP holds, nominal exchange rate alters do not influence firms’ competitive positions. Within these circumstances, firms do not need to worry about exchange risk exposure.

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