Transaction Risk

Transaction Risk refers to the possibility of financial losses due to fluctuations in exchange rates during a transaction. It arises in transactions that involve foreign currency, such as international trade or purchases and sales made in a foreign currency.

Transaction Risk is the risk that the transaction amount may change when compared to the exchange rate at the time of the agreement. These fluctuations can occur during the period before the transaction is completed or after the transaction is completed.

Transaction Risk becomes significant, especially in situations where there are sudden and large fluctuations in exchange rates. For example, when a company purchases goods from a foreign supplier, the exchange rate is determined at the time of the transaction agreement. However, changes in the exchange rate can occur until the delivery of the goods, which can affect the company’s costs. If the exchange rate is higher than it was at the time of the agreement, the company may have to pay more in local currency and its profit margin may decrease.

Transaction Risk is an important factor in international trade. Companies can use different strategies to manage transaction risk. These include futures contracts, options contracts, currency hedging instruments, and other financial instruments. These tools can help limit or eliminate potential losses caused by exchange rate fluctuations.

In conclusion, transaction risk refers to the possibility of financial losses due to fluctuations in exchange rates. It arises in transactions involving foreign currency and is an important factor in international trade. Companies can use various financial instruments and strategies to manage transaction risk.