Transaction Exposure
Companies often include transaction exposure as part of their accounting exposure, although as a cash-flow exposure, it is rightly part of a company’s economic exposure. As we have seen, transaction exposure stems from the possibility of incurring future exchange gains or losses on transactions already entered into and denominated in a foreign currency. For example, when IBM sells a mainframe computer to Royal Dutch Shell in England, it typically will not be paid until a later date. If that sale is priced in pounds, IBM has a pound transaction exposure.
A company’s transaction exposure is measured currency by currency and equals the difference between contractually fixed future cash inflows and outflows in each currency. Some of these unsettled transactions, including foreign-currency-denominated debt and accounts receivable, are already listed on the firm’s balance sheet. However, other obligations, such as contracts for future sales or purchases, are not.