To get anywhere, or even to live a long time, a man has to guess, and guess right, over and over again, without enough data for a logical answer.
— Robert Heinlein, Time Enough for Love
Transaction exposure is the most visible currency exposure and commands the most attention from managers. Operating exposure is less visible, but often is the more important exposure. Operating exposure to currency risk is defined as change in the value of nonmonetary (noncontractual) assets or operating cash flows as a result of changes in currency values. Although operating exposure is more difficult to measure and manage than transaction exposure, it can be the more important long-term exposure because it involves the firm's core business activities. As the residual owner of the firm, the exposure of shareholders' equity is the sum of net transaction exposure plus operating exposure to currency risk.
10.1 Operating Exposures to Currency Risk
Operating exposure refers to changes in the value of operating cash flows generated by the firm's nonmonetary assets due to unexpected changes in one or more exchange rates. Nonmonetary assets include physical assets, such as plant and equipment, as well as intangible assets such as patents, managerial and technical personnel, and the organizational structure that binds them together.