Transaction Exposure
The risk that an exchange rate moves between agreeing a foreign currency payment or receipt and settling it. It is the most direct form of FX exposure, for example an unpaid supplier invoice in dollars.
Related terms
FX Exposure
The degree to which a business’s financial results are affected by exchange-rate movements. It arises from foreign-currency sales, purchases, assets, liabilities or forecast cash flows.
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The effect of exchange rates on reported results when overseas subsidiaries’ accounts are converted into the parent’s reporting currency. No cash changes hands, but reported profit and net assets can move.
Read full definitionEconomic Exposure
The long-term effect of currency movements on a business’s competitiveness and future cash flows, for example when a stronger pound makes exports dearer for overseas buyers. It is the hardest form of exposure to measure and hedge.
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Hedging
Taking an offsetting position to reduce the impact of currency or price movements on a business. The aim is to protect margins and make cash flows more predictable, not to speculate.
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The amount added to or subtracted from the spot rate to price a forward contract. They reflect the interest-rate difference between the two currencies over the contract period.
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A hedging strategy that combines buying a protective option and selling another to offset the cost. It caps downside risk within a defined range while keeping some upside, often at little or no premium.
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Reducing currency risk by matching revenues and costs in the same currency, so gains and losses offset without a financial instrument, for example, paying suppliers in the currency you also earn.
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Revaluing an open position at the current market rate to show its present gain or loss. Hedges are marked to market so a business can see the live value of its contracts.
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A request for additional funds when an open hedging position moves against you and its mark-to-market loss exceeds the collateral already posted. It restores the required security buffer.
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