What defines transaction exposure?

Transaction exposure refers specifically to the risk associated with the effect of currency fluctuations on a company’s expected cash flows from its ongoing transactions. This exposure arises when a business engages in transactions involving foreign currencies that will require conversion into local currency at a future date, thus making the company vulnerable to changes in exchange rates.

When focusing on immediate currency conversions, this relates closely to transaction exposure because it captures the financial risk that occurs when converting foreign currency payments. If a company has receivables or payables in foreign currencies that require conversion into the home currency, fluctuations can result in either gains or losses when those transactions settle.

The other options do not accurately define transaction exposure. Changes in cash flows from future contracts imply a broader impact and may not directly relate to immediate transactions. Describing potential effects on value due to currency fluctuations encompasses various types of foreign exchange risk, but it does not specify the immediacy of factors involved in transaction exposure. Lastly, changes in market demand due to currency issues pertain more to operational or strategic implications of currency strength rather than the immediate financial transactions themselves.