Transaction Exposure

Definition: The Transaction Exposure is a kind of foreign exchange risk involved in the international trade wherein the cross-currency transactions (multiple currencies) are involved. In other words, a risk faced by the company that while dealing in the international trade, the currency exchange rates may change before making the final settlement, is termed as a transaction exposure.

If the Indian exporter has the receivable of $5,00,00, due five months hence, but in the meanwhile the dollar depreciates relative to the rupee, then the exporter will suffer the cash loss. But however, in the case of a payable of the same amount, the exporter gains if the dollar depreciates relative to the rupee.

Thus, once the cross-currency contract has been agreed upon by the firms located in two different countries for the specific amount of goods and money, the contract value may change with the fluctuations in the foreign exchange rates. This risk of change in the exchange rates is called the transaction exposure.

The greater the time gap between the agreement and the final settlement, the higher is the risk associated with the change in the foreign exchange rates. However, the companies could save themselves against the transaction exposure through hedging techniques.

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