# Transaction Exposure

Transaction exposure is a type of foreign exchange risk that results from the difference in the final settlement value of foreign-currency denominated assets and liabilities due to changes in exchange rate between the date those assets or liabilities arose and their settlement date.

Transaction exposure associated assets such as cash, accounts receivable, notes receivables, investments, etc. results in a gain when the currency in which the assets are denominated appreciates and vice versa. Similarly, transaction exposure associated with liabilities such as accounts payable, loan payable, etc. affects the income statement and cash flows negatively if the currency in which the liabilities are denominated appreciated and vice versa.

You work for a company based in US. Following are some recent transactions that your company participated in:

### Currency futures contracts

The GBP exposure resulting from principal balance of loan can be hedged using future contracts. At the time of inception of loan agreement, you can purchase GBP 100 million forward by entering into a 6-month futures contract to sell GBP. In the futures contract, the rate is locked based on the prevailing 180-day forward GBP/USD exchange rate, but the actual settlement occurs when your company is required to pay GBP 100 million.

### Currency options

The CAD exposure can be hedged by buying call options on CAD. The call option entitles you to purchase CAD at an exchange rate locked at time 0. If the CAD appreciates against USD, it won’t affect you because the option entitles you to purchase CAD at a rate determined before the appreciation. However, if CAD depreciated, you can let the option expire. Options are better than futures contracts and money market hedge in that it is not an obligation but an ‘option’.