What is Foreign Exchange‐Risk? Available to Purchase

The controversy between the “accounting” (“translation” or “balance‐sheet”) and the “economic” (“cash‐flow”) approaches to exchange‐risk is examined. The latter approach is advocated and a conceptual frame‐work for the cash‐flow analysis is suggested. Finally it is argued that, in the long run, the cash‐flow effects of exchange rate fluctuations are offset by countervailing movements in inflation and interest rates. Exchange‐risk is therefore a short run phenomenon, stemming from unexpected changes in exchange rates.