Today’s global economy has compelled local businesses to participate in foreign trade. Because not all traders are informed and aware of the hazards associated with overseas transactions, many firms suffer massive losses and are no longer recognizable in the marketplace (Jayashree & Priya, 2019). For instance, transaction exposure is a foreign exchange risk in global trade that incorporates cross-currency transactions, precisely numerous currencies. In other terms, transaction exposure is a concern that a corporation may have while doing business in international commerce because currency exchange rates may vary before the final agreement (Jayashree & Priya, 2019). Hence, the danger of fluctuating exchange rates is referred to as transaction exposure. Once the enterprises in two separate countries decide on a cross-currency contract in two currencies for a given amount of money and products, the value of the contract may fluctuate due to changes in foreign exchange rates. Jayashree and Priya (2019) state that the longer the time lag between the agreement and the ultimate payment, the greater the risk associated with currency fluctuations.
Firms might protect themselves from transaction risk by employing hedging techniques. Zubairu and Iddrisu (2019) acknowledge that hedging reduces the likelihood of a corporation going bankrupt and mitigates the predicted expenses of financial hardship by minimizing the unpredictability of the firm’s future worth. Companies are more likely to accept inferior investment initiatives if they do not utilize hedging. Zubairu and Iddrisu (2019) add that hedging alleviates the problem of underinvestment by lowering not just the expenses of obtaining external money but also a firm’s reliance on external finance. As possible underinvestment prices increase, so do the advantages of hedging. Thus, enterprises with excellent investment prospects are more likely to hedge and, consequently, are less vulnerable to exchange-rate risk.
References
Jayashree, G., & Priya, I. C. M. (2019). An empirical study on the various risks in foreign exchange market and its impact in global business transactions. International Journal of Trend in Scientific Research and Development, 3(5), 2613-2615. Web.
Zubairu, I., & Iddrisu, A. J. (2019). Foreign exchange exposure: An investigation of the determinants in the UK multinationals.International Journal of Economics, Finance and Management Sciences, 7(4), 95-102.