Transaction exposure arises from which of the following?

• A. Actual cash flows in foreign currencies
• B. Translation of subsidiaries' accounts
• C. Internal transfers within the same currency
• D. Tax rate changes

Answer: (A)

Transaction exposure measures the risk that the domestic value of future cash flows will be affected by changes in exchange rates. When you have actual cash flows that will be settled in a foreign currency, the amount you ultimately receive or pay in your home currency depends on the exchange rate at settlement. That potential fluctuation is exactly what transaction exposure captures.

Translations of subsidiaries’ accounts are a separate issue called translation exposure, which comes from converting financial statements into the parent currency, not from the cash flows themselves. Internal transfers within the same currency don’t involve any currency conversion, so they don’t create transaction exposure. Tax rate changes affect after‑tax cash flows but aren’t about currency risk.