Transaction Exposure is the risk faced by companies involved in international trade, that currency exchange rates will change after the companies have already entered into financial obligations. Such exposure to fluctuating exchange rates can lead to major losses for firms. Often, when a company identifies such exposure to changing exchange rates, it will choose to implement a hedging strategy, using forward rates to lock in an exchange rate and thus eliminate the exposure to the risk.

In international trade, the risk that exchange rates will change after a company has agreed to a transaction but before it is accomplished, such that it adversely affects the transaction. For example, suppose an American company agrees to buy goods from a British company and settle the transaction in pounds. The American company has the transaction exposure that the pound will appreciate with respect to the U.S. dollar, causing the company to spend more dollars to buy the same number of pounds to be able to settle the transaction.

Transaction exposure is always easily identifiable and quantifiable, because it is the exact amount of the payable or receivable, which is known and certain. Also, transaction exposure always involves known and certain CF’s, so the risk exposure is well defined.

Transaction risk is the exchange rate risk associated with the time delay between entering into a contract and settling it. The greater the time differential between the entrance and settlement of the contract the greater the transaction risk, because there is more time for the two exchange rates to fluctuate. Transaction risk creates difficulties for individuals and corporations dealing in different currencies, as exchange rates can fluctuate significantly over a short period of time. This volatility is usually reduced, or hedged, by entering into currency swaps and other similar securities.

Transaction exposure stems from the possibility of incurring future exchange gains or losses on transactions already entered into and denominated in a foreign currency. It’s measured currency by currency and equals the difference between contractually fixed future cash inflows and outflows in each currency. Also, some actions taken to hedge against translation exposure could increase transaction exposure. For example, if a currency is expected to weaken, deferring the sale to a future period could reduce the translation exposure for the current period, this would reduce A/R in the current period, but if there were a contract for the sale to take place in the future, it would increase transaction exposure. (webpage.pace.edu/pviswanath)