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Understanding Transaction Exposure

The document discusses foreign exchange exposure, which is the unanticipated change in an exchange rate that can affect the value of a firm's assets, liabilities, and cash flows. It describes different types of foreign exchange exposure including transaction, translation, economic, and operating exposures. Transaction exposure specifically refers to foreign exchange gains or losses from transactions already entered into that are denominated in a foreign currency. The document outlines factors that affect transaction exposure and how it can be measured by aggregating exposures across currencies and netting inflows and outflows while considering exchange rate changes and volatilities.

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Sam Smith
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8 views9 pages

Understanding Transaction Exposure

The document discusses foreign exchange exposure, which is the unanticipated change in an exchange rate that can affect the value of a firm's assets, liabilities, and cash flows. It describes different types of foreign exchange exposure including transaction, translation, economic, and operating exposures. Transaction exposure specifically refers to foreign exchange gains or losses from transactions already entered into that are denominated in a foreign currency. The document outlines factors that affect transaction exposure and how it can be measured by aggregating exposures across currencies and netting inflows and outflows while considering exchange rate changes and volatilities.

Uploaded by

Sam Smith
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Amity Business School

Amity Business School

Foreign Exchange Exposure


Foreign exchange exposure is
the unanticipated change in
the exchange rate.
This change effects the:
❑ Value of the assets &
liabilities of the firm.
❑ Cash flow- present as well
as future
Amity Business School

Remember Foreign Exchange exposure is


conceptually different from
Foreign Exchange Risk.

But they are used


interchangeable in general.
Amity Business School

Types of Foreign Exchange Exposure

Exchange
Exposure

Economic Translation
Exposure Exposure

Real
Transaction
Operating
Exposure
Exposure
Amity Business School

Transaction Exposure
It refers to the foreign exchange loss or gain on transaction
already entered into and is denominated in Foreign Currency.

It emerges mainly on account of the followings:

❑ Export and Import of commodities on open


account.
❑ Borrowing and lending in a foreign currency

❑ Intra firm flow in a international company


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Factors Effecting Transaction Exposure

Proportion of Trade in
foreign Currency

Time Lag between the


actual cash flow and
Invoicing

Volatility of Exchange
rate
Amity Business School

Measuring Transaction Exposure

Aggregation of Exposure in different


foreign currencies

Netting the inflows and the outflows

Forecasting the change in Exchange


rates & their Volatilities

Studying correlation between different


currencies
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Remember
Factors that would govern the quantum of transaction
exposure would be dependent upon:
❑ The volatility as measured by standard Deviation of the
currency of exposure
❑ The nature and degree of the coefficient of correlation in
the various currencies of exposure
Amity Business School

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