This is a measure of the sensitivity of the home currency value of the assets and liabilities, which are denominated, in the foreign currency, to unanticipated changes in the exchange rates, when the assets or liabilities are liquidated. The foreign currency values of these items are contractually fixed, i.e.; do not vary with exchange rate. It is also known as contractual exposure.
Some typical situations, which give rise to transactions exposure, are:
(a)Â A currency has to be converted in order to make or receive payment for goods and services;
(b)Â A currency has to be converted to repay a loan or make an interest payment; or
(c)Â A currency has to be converted to make a dividend payment, royalty payment, etc.
Note that in each case, the foreign value of the item is fixed; the uncertainty pertains to the home currency value. The important points to be noted are (1) transaction exposures usually have short time horizons and (2) operating cash flows are affected.
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