Transaction Exposure Definition

Transaction exposure is the risk that a company’s financial statements will be adversely affected by changes in exchange rates. It arises when a company has transactions in foreign currencies, such as when it exports goods or services to customers in other countries.

When a company has transaction exposure, it is exposed to the risk of losses if the value of the foreign currency changes relative to the home currency. For example, consider a U.S. company that exports products to customers in Europe. If the value of the euro decreases relative to the dollar, then the U.S. company will incur losses on its European sales.

Transaction exposure can be hedged using forward contracts, options, or other derivatives. By Entering into a forward contract, a company can lock in an exchange rate for a future transaction. This protects the company from losses if the value of the foreign currency declines relative to the home currency.