Transaction exposure

Definition

Transaction exposure is the risk that a company's financial performance or position will be affected by fluctuations in exchange rates between the transaction date and the settlement date. It primarily concerns cash flows and contracts denominated in foreign currencies.

5 Must Know Facts For Your Next Test

1. Transaction exposure can impact both revenue and expenses when dealing with international transactions.
2. Hedging strategies, such as forward contracts and options, are commonly used to manage transaction exposure.
3. It differs from translation exposure, which affects financial statements due to currency conversion.
4. Transaction exposure is a short-term risk linked directly to specific transactions rather than long-term economic conditions.
5. Companies often assess their transaction exposure to determine the potential impact on their profit margins.

Review Questions

• What is the primary difference between transaction exposure and translation exposure?
• How do companies typically manage transaction exposure?
• Why is transaction exposure considered a short-term risk?

Related terms

Forward Contract: A financial agreement to buy or sell an asset at a predetermined future date for a price that is specified today.

Hedging:

Financial strategies used to reduce or eliminate the risk of adverse price movements in an asset.

Translation Exposure:

The risk that a company's consolidated financial statements will be affected by fluctuations in exchange rates when foreign subsidiaries' assets and liabilities are converted into the parent company's currency.