Transaction exposure

The transaction exposure component of the foreign exchange rates is also referred to as a short-term economic exposure. This relates to the risk attached to specific contracts in which the company has already entered that result in foreign exchange exposures. A company may have a transaction exposure if it is either on the buy side or sell side of a business transaction. Any transaction that leads to an inflow or outflow of a foreign currency results in a transaction exposure. For example, Company A located in the United States has a contract for purchasing raw material from Company B located in the United Kingdom for the next two years at a product price fixed today. In this case, Company A is the foreign exchange payer and is exposed to a transaction risk from movements in the pound rate relative to dollar. If the pound sterling depreciates, Company A has to make a smaller payment in dollar terms, but if the pound appreciates, Company A has to pay a larger amount in dollar terms leading to foreign currency exposure.

Translation exposure

References

Fundamentals of Internation Financial Management; David Eiteman; 2007 The Economics of Foreign Exchange and Global Finance; Piejie Wang; 2009 Management of Economic Exposure

Resources

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