Transaction Risk
a.k.a. Transaction exposure
The risk that exchange rates move between agreeing a deal in a foreign currency and actually paying or…
In plain English
The risk that exchange rates move between agreeing a deal in a foreign currency and actually paying or receiving the money.
Transaction risk hits businesses that buy or sell abroad. Say a US company agrees to pay a German supplier 1 million euros in 90 days. If the euro strengthens in the meantime, those euros cost more dollars than planned, and the profit on the deal shrinks.
Companies manage it with forwards, options and other hedges that lock in a rate. It is a big source of everyday, non-speculative flow in the forex market.
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