What is an example of transaction exposure?

A manufacturer orders machinery from overseas priced at US$500,000, payable in 120 days. At the time of the order the dollar buys 1.50 units of home currency, so the cost is 750,000. If the dollar buys 1.65 by the payment date, the same machine costs 825,000. The extra 75,000 is transaction exposure turned into cash: the contract did not change and the business paid more. An exporter waiting on a dollar invoice has the same risk in the other direction.

How do you hedge transaction exposure?

The usual tools are a forward exchange contract, which fixes the rate for a future date; a currency option, which sets a limit for a premium; and a money market hedge, which uses borrowing in one currency and a deposit in the other to lock in the rate. A business can also reduce the exposure before hedging, by matching currency receipts with payments, invoicing in its own currency or adding a currency adjustment clause to its contracts. A lender looks at the net amount left after those steps, then at how much of it is covered.

Is transaction exposure realised or unrealised?

Both, at different moments. While a receivable or payable is open, its retranslation at a balance date produces an unrealised gain or loss in the accounts. When it settles, the difference becomes realised cash. Orders and forecast purchases are exposed too, but generally appear nowhere in the accounts until they are delivered or invoiced. That is why a lender reading only the balance sheet will understate the amount at risk, and asks for the forward order book.

Does invoicing in my own currency remove transaction exposure?

It removes it from your contract and moves it to your customer's. The overseas buyer now carries the currency risk and may ask for a lower price or take its business to a supplier invoicing in its own currency when the rate moves against it. So the exposure can come back as a lost sale or a price cut, which is economic rather than transaction exposure. A lender reading an exporter that invoices at home still asks how the customer is taking the risk.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Transaction Exposure: a Worked Example

The price was agreed. What it costs at home was not.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

Transaction exposure is the question a lender asks of any business that has fixed a price in one currency and will settle it from another: how much cash moves if the rate is different on the day the money does? A dishwasher maker buying US$8.0m of parts a year, on a price list it cannot change until next year, can lose almost a third of its EBITDA to a 10% rise in the dollar without selling one fewer machine. The lender wants that figure net, by currency and month, after hedges, and set against the debt service.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 02 — Aoraki Trade Exports. Paid in USD, costs in NZD, asking for a NZ$6m multi-currency facility. The MD won't say which currencies. Your call first, then the senior banker's.

Read the file →

PART OF Foreign Exchange Facilities

// 01 — WHY THE MONEY MOVES AND WHO FEELS IT

A business that sells at home and buys abroad, or the reverse, has its revenue in one currency and part of its costs in another, and its margin is the difference. Once a price is fixed in a foreign currency, the amount is known in that currency and unknown in the one the business pays its staff and its bank with. An exporter is hurt when the foreign currency falls before it is paid. An importer is hurt when the foreign currency rises before it pays.

The exposure starts earlier than the accounts show it. It begins when the business commits to a price: a quotation that binds, then an order on the books, then an invoice, and it ends at settlement. Only the last stage is on the balance sheet as a receivable or payable. Sales and purchases are not the only source either. Interest and principal on a foreign-currency loan, a progress payment on imported plant and a dividend from overseas all carry it.

A lender's interest is direct. Cash lost on settlement is cash that was going to service debt, and a thin-margin business can lose a large share of its earnings to a small move in the rate.

// 02 — HOW THE EXPOSURE IS MEASURED

Gross exposure = amounts fixed in the currency, by month

Net exposure = receipts − payments in that currency

Unhedged = net exposure − hedges in place

Cash effect = unhedged amount × change in the rate

Each currency is a separate calculation, because a surplus in one does not cover a shortfall in another unless the two happen to move together, and a lender does not assume they will. Timing matters too: a receipt in March does not offset a payment in September without a hedge or a cash balance to carry it across.

The accounts catch only part of this. Under NZ IAS 21 and Australia's AASB 121, and under section 30 of FRS 102 in the UK where most mid-market groups report, a monetary item in a foreign currency is retranslated at the closing rate, and the difference goes through profit or loss, subject to exceptions for hedges and net investments. So a year-end balance shows the payable already booked, and not the order placed yesterday or next quarter's purchases. A reduced-disclosure set of accounts may say little about any of it, which is why the desk asks for an exposure schedule from management.

// 03 — THE EXAMPLE

A maker of commercial dishwashers, constructed for this page like every figure in it, buys US$8.0m of pumps and control boards a year, priced in US dollars. Its own price list is fixed for the year. It budgets at 1.60 units of home currency to the dollar, has EBITDA of 4.00m in home currency and debt service of 2.20m. The dollar then rises 10% to 1.76 and stays there. Debt service here is measured simply against EBITDA, and the ratios belong to the example.

Parts at budget rate: 8.00 × 1.60 = 12.80m

Parts at new rate: 8.00 × 1.76 = 14.08m

Extra cash paid out: 1.28m

EBITDA: 4.00 − 1.28 = 2.72m

Cover before: 4.00 ÷ 2.20 = 1.82×

Cover after: 2.72 ÷ 2.20 = 1.24×

Nothing in the business changed: the same machines, the same customers, the same prices. Now suppose the maker also sells US$1.5m a year abroad in dollars and has sold nothing forward, and then that it has bought US$4.0m forward at 1.60, ignoring forward points:

Net of dollar sales: 8.0 − 1.5 = 6.5m

Loss on 0.16: 6.5 × 0.16 = 1.04m

EBITDA and cover: 2.96m ÷ 2.20 = 1.35×

After US$4.0m forwards: 6.5 − 4.0 = 2.5m

Loss on 0.16: 2.5 × 0.16 = 0.40m

EBITDA and cover: 3.60m ÷ 2.20 = 1.64×

The same move in the rate gives three different answers depending on what the lender has been told. Gross, the file looks thin. Net and hedged, it looks manageable. The reading depends on which figure management can evidence.

// 04 — HOW IT DIFFERS FROM ITS TWO NEIGHBOURS

Translation exposure arises when an overseas subsidiary's results are restated into the group's currency for reporting. It changes the numbers in the accounts, and the cash follows only when money is actually sent home. Transaction exposure is contractual and settles in cash.

Economic exposure is wider and vaguer. It is the effect of a currency move on sales and costs not yet agreed: a competitor priced in a weaker currency, an export market that stops being profitable, a supplier who reprices next year. A forward fits it badly, because there is no fixed amount to hedge. A lender reads it through a sensitivity on the forecast, and through the question of whether the business could raise prices.

DEFINED IN ONE PARAGRAPH → · TRANSLATION EXPOSURE → · A FORWARD, FROM THE EXPORTER'S SIDE →

// 05 — WHERE IT DECIDES A FILE

Three questions usually settle how much the exposure matters. Can the business pass the cost on, and how quickly? A supplier contract or sales contract with a currency adjustment clause moves the risk to the other party; a fixed annual price list keeps it. How much is offset already, through a natural hedge such as dollar sales or dollar debt? And how much of the remainder is covered, under what written policy?

The answers shape the facility. The bank may size a forward line to the net exposure and ask for a hedge cover undertaking, and it stresses debt service at a rate that is worse than budget. A file like the one above, where a single move takes cover from 1.82 to 1.24 times, is one where the currency is part of the credit decision and has to be written up as such.

HOW BANKS READ EXPORTERS → · FX FACILITIES → · DEBT SERVICE COVER →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Australian Accounting Standards Board, AASB 121 The Effects of Changes in Foreign Exchange Rates, compiled standard prepared 5 March 2025, for periods beginning on or after 1 January 2025 — paragraphs 23 and 28 — Monetary items are translated at the closing rate, and exchange differences on them go to profit or loss except as paragraph 32 provides; NZ IAS 21 carries the same requirement from the same international standard — section 02.
HM Revenue & Customs, Corporate Finance Manual, CFM23080 (FRS 102: financial assets and liabilities denominated in a foreign currency) — Section 30 of FRS 102 requires exchange differences on monetary items to be recognised in profit or loss as they arise, unless they form part of a net investment in a foreign operation — section 02.

// QUESTIONS PEOPLE ASK

What is an example of transaction exposure?: A manufacturer orders machinery from overseas priced at US$500,000, payable in 120 days. At the time of the order the dollar buys 1.50 units of home currency, so the cost is 750,000. If the dollar buys 1.65 by the payment date, the same machine costs 825,000. The extra 75,000 is transaction exposure turned into cash: the contract did not change and the business paid more. An exporter waiting on a dollar invoice has the same risk in the other direction.
How do you hedge transaction exposure?: The usual tools are a forward exchange contract, which fixes the rate for a future date; a currency option, which sets a limit for a premium; and a money market hedge, which uses borrowing in one currency and a deposit in the other to lock in the rate. A business can also reduce the exposure before hedging, by matching currency receipts with payments, invoicing in its own currency or adding a currency adjustment clause to its contracts. A lender looks at the net amount left after those steps, then at how much of it is covered.
Is transaction exposure realised or unrealised?: Both, at different moments. While a receivable or payable is open, its retranslation at a balance date produces an unrealised gain or loss in the accounts. When it settles, the difference becomes realised cash. Orders and forecast purchases are exposed too, but generally appear nowhere in the accounts until they are delivered or invoiced. That is why a lender reading only the balance sheet will understate the amount at risk, and asks for the forward order book.
Does invoicing in my own currency remove transaction exposure?: It removes it from your contract and moves it to your customer's. The overseas buyer now carries the currency risk and may ask for a lower price or take its business to a supplier invoicing in its own currency when the rate moves against it. So the exposure can come back as a lost sale or a price cut, which is economic rather than transaction exposure. A lender reading an exporter that invoices at home still asks how the customer is taking the risk.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Markets salespersonSells the bank's markets products — foreign exchange, interest rate hedging, commodities — to corporate and institutional clients.
Treasury analystFunds the bank and manages the interest rate and liquidity risk created by its own balance sheet.
Corporate coverage bankerOwns the bank's relationship with a large corporate or institutional client and orchestrates everything the bank sells into it.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE FIRST QUESTION · THE LOAN · HEDGES

An exporter sells in euros and reports in US dollars. It has euro receivables worth about US$5m due in 90 days, and asks the bank for a forward contract.

What does the forward fix?

6 MORE ON THE LOAN · HEDGES →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHTransaction exposure What is the difference between transaction exposure and translation exposure?