What causes transaction exposure?

Transaction exposure arises from fluctuations in exchange rates that affect the value of a company's foreign currency-denominated transactions. It occurs when a business has receivables or payables in foreign currencies, leading to potential gains or losses when these amounts are converted into the company's functional currency. Factors such as the timing of currency transactions and market volatility can exacerbate this exposure. Essentially, any delay between entering a contract and settling it can lead to transaction exposure.