We examine the effectiveness of firms’ operating and financial activities in managing their exchange rate exposure. Unlike previous studies, we measure the expected exchange rate exposure which reflects exchange rate risk associated with firms’ inherent business activities prior to the usage of exposure management activities and compare it with the observed exchange rate exposure which reflects the effects of firms’ exposure management activities as well. We show that the effectiveness of exposure management activities depends on the underlying characteristics (e.g., direction) of the firm’s inherent expected exchange rate exposure. While firms with positive expected exposure reduce their exposure through currency derivatives, internal transactions with foreign subsidiaries, and the issuance of foreign currency debt, firms with negative expected exposure do so only through exchange rate pass-through activities. Our results strongly suggest that in order to uncover the effectiveness of a firm’s exposure management activities, one must consider both the conditions in the firm’s product market (e.g., export and import ratios and profit margin) and the direction of exchange rate exposure.