What Is Transaction Exposure?
Transaction exposure is the FX risk on a specific, already-agreed trade. It's the most immediate form of currency risk for trading businesses.
Key Takeaways
- Transaction exposure is the risk that exchange rate changes between order and payment affect your costs or revenue.
- It applies to any committed transaction where payment hasn't yet been made or received.
- Forward contracts are the most common way to eliminate transaction exposure.
What transaction exposure is
Transaction exposure arises whenever you have a committed transaction in a foreign currency but payment hasn't yet occurred. When you place a purchase order with an overseas supplier, you've committed to a cost in their currency — but the exchange rate may move before you pay, changing what that commitment costs you in your home currency.
The lifecycle of transaction exposure
Exposure begins when a transaction is agreed or an order is placed. It ends when the currency is actually exchanged. The longer the gap between agreement and payment, the greater the opportunity for exchange rate movement. A 30-day payment term creates less exposure than a 90-day letter of credit.
Measuring it
Transaction exposure is the total value of committed but unpaid foreign currency transactions. If you have three confirmed purchase orders totalling $250,000, payable over the next 60 days, your transaction exposure is $250,000 minus any USD you already hold. A 5% dollar strengthening would add approximately £10,000 to your sterling cost (assuming ~£200,000 equivalent).
Eliminating it
A forward contract eliminates transaction exposure by locking in the rate at the time of order. As soon as you place a purchase order, book a forward to buy the currency needed for payment at maturity. The rate is fixed — the movement between order and payment date no longer affects you. This is the most common approach used by importers.