Factors Affecting Firm’s Degree of Transaction Exposure Companies have to deal with transaction exposure in cases when they pay out or receive cash assets in foreign currencies with flexible exchange rates. A firm can experience an increase in transaction exposure when it is expecting to receive a cash payment in currency with a fluctuating value. It is important for companies first to calculate the exposure to make decisions as to its management. Operating exposure of a company indicates the “at-the-moment” value of a company that results from changes in the inflows and outflows of cash that are caused by sudden changes in the foreign exchange rates (Eiteman, Stonehill, & Moffett, 2013). While transaction exposure of a firm results from accounting, operating exposure results from economics. A firm’s transaction exposure can arise from purchasing and selling of credit goods and services in cases when the prices are established in foreign currencies, lending or borrowing assets when the amount is to be repaid in a foreign currency, and acquiring assets or incurring liabilities in foreign currencies (Eiteman et al., 2013). One of the most widespread examples of transaction exposure is a company dealing with a payable or receivable in a foreign currency (Eiteman et al., 2013). Thus, currency variability is the key factor that influences the firm’s degree of transaction exposure. In order for the management to first estimate the firm’s transaction exposure, it is important to determine the cash flow in specific currencies and then measure the possible impact of such exposure with regards to the currencies a firm is dealing with. The desirable characteristic of currency variability is the low level; however, there may be some variations depending on the type of cash flows. For example, a low level of currency variability is preferred when the company is dealing with net inflows of currency ( Chapter 10. Measuring exposure to exchange rate fluctuations , n.d.). On the other hand, a high level of currency variability is preferred in cases when available currencies coming from opposite directions (one currency outflows while another inflows). According to Eiteman et al. (2013), the process of hedging can become an effective currency variability management tool that may significantly improve the firm’s planning capability. Forward Market Hedging The forward market (currency forward) hedge is one of the most widespread methods companies use for managing or hedging transaction exposure. In general terms, forward market hedging occurs when a company sells or buys its foreign currency payables or receivables to eliminate transaction exposure (Goel, 2012). Forward exchange risk management implies the participation of two firms, one of which is selling and another buying an asset at an agreed price. The party that agrees to buy an underlying asset in the nearest future takes a long position, while the firm-seller takes a short position. When exchanges are applied to such deals, the buyer in a forward contract expects the established currency to increase in value in the nearest future, while the seller expects this currency to lose its value. If a company receives foreign curre