· TRANSACTION EXPOSURE (BUSINESS)

A transaction exposure arises whenever a company is committed to a foreign currency denominated transaction entered into before the change in exchange rate. Transaction exposure measures the effect of an exchange rate change on outstanding obligations which existed before the change, but were settled after the exchange rate change.

Transaction exposure, deals with changes in cash flows that result from existing contractual obligation due to exchange rate changes. In other words it refers to the extent to which the future value of firm’s domestic cash flow is affected by exchange rate fluctuations.

The level of transaction exposure depends on the extent to which a firm’s transactions are in foreign currency. In other words, the transaction in exposure will be more if the firm has more transactions in foreign currency.

Transaction risk is critical to an MNC’s due to the high variability in exchange rates. Transaction exposure has become an important function of International Financial Management as firms are now more frequently entering into financial & commercial contracts denominated in foreign currencies, judicious measurement & management of transaction exposure.