The principle focus is on the items which will have the impact on the cash flows of the firm and whose values are not contractually fixed in foreign currency terms. Contingent exposure has a much shorter time horizon. Typical situation giving rises to such exposures are
- An export and import deal is being negotiated and quantities and prices are yet not to be finalized. Fluctuations in the exchange rate will probably influence both and then it will be converted into transactions exposure.
- The firm has submitted a tender bid on an equipment supply contract. If the contract is awarded, transactions exposure will arise.
- A firm imports a product from abroad and sells it in the domestic market. Supplies from abroad are received continuously but for marketing reasons the firm publishes a home currency price list which holds good for six months while home currency revenues may be more or less certain, costs measured in home currency are exposed to currency fluctuations.
In all the cases currency movements will affect future cash flows.
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