IF-Transaction Exposure

Transaction Exposure involves different transactions where items are traded in foreign currency, i.e., there are contractual future cash flows of the foreign currency. For example, a company may sign a contract to supply machine parts to a foreign company at a specified sell price. The company will be susceptible to fluctuations in foreign exchange markets till it receives payment and converts it into domestic currency. The company’s exposures can be calculated by deducting the potential future inflows from future outflows. There are various methods that can be employed to minimise transactional exposure risks, namely,

o          Forward contracts.

o          Price adjustment clauses.

o          Currency options

o          Borrowing and lending in foreign currency.

o          Invoicing in domestic currency, etc.