What you do mean by transaction exposure? Describe various techniques available to manage transaction exposure both in the short term as well as the long term.
Transaction exposure refers to the risk associated with changes in exchange rates between the time a transaction is initiated and when it is completed. This exposure arises due to fluctuations in currency values that can impact the value of financial commitments, such as payables or receivables, in international business transactions. Companies involved in cross-border transactions face the risk that the currency exchange rate will change unfavorably before the transaction is settled, which could result in losses or gains.
There are various techniques to manage transaction exposure, both in the short term and long term. In the short term, companies primarily rely on financial instruments or strategies to hedge against currency fluctuations.
1. Forward Contracts: A forward contract is a financial agreement between two parties to exchange currencies at a future date at a predetermined exchange rate. This allows a company to lock in the exchange rate for a specific future transaction, ensuring that any fluctuations in the market will not affect the value of the transaction.
2. Futures Contracts: Similar to forward contracts, futures contracts are standardized agreements traded on exchanges. These contracts obligate the holder to buy or sell a specified amount of a foreign currency at a fixed price on a set date. While forward contracts are customized and can be tailored to
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