Step 2 of 2 The sensitivity of value of the firm’s cash flows due to exchange rate movements is referred to as transaction exposure. The sensitivity of the (amount of) firm’s cash flows to exchange...

The sensitivity of value of the firm’s cash flows due to exchange rate movements is referred to as transaction exposure. The sensitivity of the (amount of) firm’s cash flows to exchange rate movements is referred to as economic exposure.

An exporting firm that invoices in foreign currencies is exposed to transaction exposure, because if the value of the foreign currency falls in exchange rate movements, then the exporting firm will receive less in terms in its home currency for any given amount of foreign currency cash flows.

If, on the other hand, the exporting firm starts to invoice in the home currency, it would get rid of transaction exposure. However, it will now be subject to economic exposure. This is because if the value of foreign currency falls, the buyers in the foreign countries will now have to pay more in terms of their own currency to import any given quantity of products. This can induce these buyers to source the product from the suppliers in their own country, which will cause the exporting firm’s cash flows to fall.

Therefore, the conclusion is:
Yes, based on the new strategy, the firm will be subject to economic exposure to exchange rate risk in the future.