Types of Exposures

The foreign exchange exposures may be classified under three broad categories:
(1). Transaction Exposure: A transactions exposure occurs when a value a future transaction, though known with certainty, is denominated in some currency other than the domestic currency. In such cases, the monetary value is fixed in terms of foreign currency at the time of agreement which is completed at a later date. Transaction exposure refers to the potential change in the value of a foreign currency denominated transaction due to changes in exchange rates.
(2). Translation Exposure: This is also known as accounting exposure. It refers to and deals with the probability that the firm may suffer a decrease in assets value due to devaluation of a foreign currency even if no foreign exchange transaction has occurred during the year, this exposure needs to be measured so that the financial statements i.e. the balance sheet and the income statement reflect the change in the value of assets and liabilities.