Transaction exposure is the risk taken on by companies that involve themselves in international trade. The risk is exchange rates fluctuating after companies have committed to certain financial obligations. The exposure of the changing rates can lead to substantial financial losses for companies. Companies can feel exposed since they involved in contracts that have not yet been settled and as a result lead to gains and losses. Since the contracts have already been entered into the Financial Accounting Standards Board (FASB) requires them to be reported on financial statements. Transaction exposure is economic exposure to markets but can also be categorized under accounting or operating exposure.

By taking currency to currency you get the difference between the fixed cash inflows and outflows that the contract states. This measurement tells a firm just how much transaction exposure they really have. For example, if Caterpillar sold heavy machinery to a construction company in France who contractually agreed to pay on a later date Caterpillar is left exposed if the contract is priced in Euros.

There is a variety of ways for firms to eliminate some the risk associated with transaction exposure. Some of which are; use of forward contracts, currency options and lending and borrowing in foreign currency, a firm may also decide to do all its transactions in dollars. This eliminates transaction exposure but the firm is still subject to foreign currency exposure.

One of the commonly used hedging tools used by firms is called the forward market hedge. This is where a company that is short on a foreign currency will buy a currency forward and a company that is long on a foreign currency will sell that currency forward. By doing this a firm enables itself to lock in the dollar value of a future foreign currency cash flow.

Another hedging technique used is the money-market hedge. This is where a firm continuously borrows and lends in two or more currencies to fix the dollar value of foreign currency cash flows.

Implementing the right hedging strategy is important for firms who do business globally. By properly managing hedging policy a firm can substantially increase revenues. 

Works cited:
http://www.investopedia.com/terms/t/transactionexposure.asp