As I stated before, when a company goes global there are risks involved and one in particular is the transaction exposure. Transaction exposure is the possibility of obtaining future profits or losses on the exchange of currency. This gain or loss is usually included in the accounting exposure of the company (Shapiro, 2009, 236). This idea becomes a big deal for the larger companies because when you are making a 50 Billion dollar deal, a 4% changing in the value of the currency can produce well for the company or be terrible for the company.

The companies need to hedge against the transaction cost and ways to do this are call and put options which give the company the ability to obtain an option to sell a specific currency at a specific time (Khazeh, 2001, 84). This takes away the variations that the currency may go through during the process of the sale giving the company a set exchange rate to work with for that sale. It makes it a lot easier to predict what the costs and profits of the deal will be. Also, companies go by the interest rate parity theory when doing international deals. The interest rate parity ensures that on a hedged foreign investment the return will equal the domestic interest rate on investments of identical risk. Another tool companies have to master to the ability to measure the amount of transaction exposure they will encounter. They can do this by looking at the interest rate, GDP, Unemployment, Real estate, and others. The company wants to analyze where they are headed and how that is going to affect the currency. By looking at this they can have an idea if the currency will depreciate or appreciate in the future.

Hedging transaction costs is not easy but there are ways to do it. These are just a couple out of the many different techniques companies use to hedge. Once a company has mastered the hedging of transaction costs they can become dominate multinational corporations, and become very successful in what they do.