Transaction Exposure – Risk in Receivables & Payables

This is the most common exposure. It happens every time you send an invoice in a foreign currency.

1. How it arises

1. Buying/Selling on Credit:

   • Jan 1: Sold goods for $1,000. Rate = 80. (Expected = ₹80,000).
   • Mar 1: Payment received. Rate = 78. (Actual = ₹78,000).
   • Loss: ₹2,000.

2. Borrowing/Lending:

   • Took a loan of $1 Million when rate was 70.
   • Repaying when rate is 80.
   • Loss: ₹10 per dollar on Principal.

2. Measurement: Net Exposure

An MNC usually has both Imports and Exports. Net Exposure = Total Foreign Currency Inflows - Total Foreign Currency Outflows

• Example:
  • Export Receivables: $5 Million.
  • Import Payables: $3 Million.
  • Net Long Position: (+) $2 Million.
  • Risk: If Dollar falls, we lose.

3. Managing: Internal Strategies

Before running to a bank for hedging, use common sense.

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4. Exam Notes: Writing the Answer

Question: "What is Transaction Exposure? How can it be managed internally?" (10 Marks)

Answering Strategy:

1. Define: "Risk arising from contractual cash flows...".
2. Example: Give the Export example (Jan 1 vs Mar 1).
3. Techniques: Explain "Leading & Lagging" and "Netting".
4. Crucial Note: Mention that Transaction Exposure is about Cash, unlike Translation which is about Paper.

Summary

• Reality: This exposure hits the Bank Balance directly.
• Management: Most companies hedge 100% of their transaction exposure because it is short-term and predictable.

Quiz Time! 🎯

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