... the "exposure" to exchange rate changes (the amount of cash flows whose domestic currency value is sensitive to exchange rate changes. Categories of exchange rate risk: Foreign exchange exposure is usually categorized according to whether it falls into one or more of the following categories: 1. Transaction exposure 2. Economic exposure 3. Translation exposure Transaction exposure Transaction exposure is concerned with how changes in exchange rates affect the value of anticipated foreign currency denominated cash flows relating to transactions already entered into. By failing to cover transaction exposure, a firm may incur a vast loss on a single very large receivable or payable denominated in a foreign currency. This may result in an overall loss for the firm in a particular financial period which could in its turn, lead to financial distress. There is little consolation in the company being all right in the long run if it is dead in the short run. The prudent finance director ...

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