How to Calculate Transaction Exposure

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Transaction exposure is a term in business used to define the amount of risk one country takes on when doing business with another country due to fluctuating currency exchange rates. For example, if a country signs a three-year contract to do business with another country and currency exchange rates suddenly make the first country's currency worth less, the contract will not be worth as much as originally expected. While there is no firm formula to calculate transaction exposure, there are indicators to look for.

Transaction exposure is a term in business used to define the amount of risk one country takes on when doing business with another country due to fluctuating currency exchange rates. For example, if a country signs a three-year contract to do business with another country and currency exchange rates suddenly make the first country's currency worth less, the contract will not be worth as much as originally expected. While there is no firm formula to calculate transaction exposure, there are indicators to look for.

View the length of the contract that the transaction exposure is being accounted for. A three-year contract between companies from two countries is completely different from a one-year contract between companies from three different countries.

Examine the exchange rate histories of the countries involved in the contract. Pay close attention to large shifts on a year-to-year basis, as it would indicate an unstable economy and one with a large transaction exposure rating.

Determine the ordinary rate of growth or decline in a country's currency by looking at the last few decades of the exchange rate. This is the rate of growth or decline a company should be prepared to encounter during the length of the contract.

Be aware of any new of social upheaval of the country the company is located in. While smaller events in the country should not affect the currency exchange rates, large scale changes in the country's economy will dramatically change the transaction exposure of the contract.

Warnings

  • No matter how much you calculate for transaction exposure, certain unforeseen events -- for example, the collapse of the currency system of the country you are in business with -- can render your predictions void.

References

About the Author

Rick Paulas is a freelance writer based out of Los Angeles. He has been writing professionally since 2005. He has previously written for "McSweeney's," ESPN.com, "Vice Magazine" and "Radar Magazine," and has worked as an editor for "The Coming," "Duct Tape & Rouge," and "TSB Magazine." Paulas holds a Bachelor of Arts in telecommunications and advertising from Michigan State University.

Photo Credits

  • exchange fluctuations image by Raimundas from Fotolia.com