Question

Which of the following is an example of transaction exposure?

A.An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers.
B.An increase in the pound's value increases the U.S. firm's cost of British pound payables. A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables.
C.The dollar value of sales is higher if the pound depreciates against the dollar.
D.The dollar value of sales is unaffected by the pound's exchange rate.

Answer 1

The correct example of transaction exposure is when an increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers.

The correct example of transaction exposure is option A: An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers.

Transaction exposure refers to the risk that a company faces when its financial transactions are denominated in foreign currencies. In this case, a U.S. firm is negatively affected by the increase in the value of the dollar because it makes their products more expensive for foreign customers. This allows foreign competitors to increase their sales to U.S. customers.

For example, if the dollar strengthens against the euro, it means that the euro weakens. If a U.S. firm exports goods to European countries, the higher value of the dollar makes their products more expensive for European consumers. As a result, foreign competitors who sell similar products but use euros or other currencies will have a competitive advantage and may be able to increase their sales to U.S. customers.