Transaction risk

An export receivable, import payable or foreign-currency borrowing can expose a business to an unfavourable exchange movement before settlement. The direction of risk depends on whether foreign currency will be received or paid and on the quotation used. Forward contracts, money-market hedges, options and natural offsets can reduce the exposure, but each has costs and limitations. A forecast transaction also has volume and timing uncertainty, so hedging an amount that never occurs can create a new exposure. Transaction risk concerns cash flows and differs from translation of reported balances.