Definition
Transaction Exposure
Transaction exposure is the risk that a known future foreign-currency cash flow will be worth more or less in home currency by the time it is settled.
If an Indian exporter has booked a sale of USD 1 million due in 90 days, a rupee that strengthens before payment means fewer rupees received, a direct cash loss. This is transaction exposure, the most concrete form of forex risk.
It is typically hedged with forwards, futures or options that lock in the conversion rate. It differs from translation exposure (an accounting effect) and economic exposure (long-run competitive impact), and is the exposure most firms hedge first.
Related terms
- Forward Premium / DiscountA currency trades at a forward premium when its forward rate is higher than spot, and at a discount when lower, driven mainly by the interest rate gap between the two countries.
- Hedging Forex RiskHedging forex risk means using forwards, futures, options or swaps to lock in or limit the exchange-rate cost of future foreign-currency cash flows.
- Natural HedgeA natural hedge offsets currency risk through the structure of a business itself, such as matching foreign-currency revenues with foreign-currency costs, rather than using derivatives.
- Translation ExposureTranslation exposure is the accounting impact on a company's consolidated financials when foreign-currency assets, liabilities and earnings are converted into the reporting currency.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.