In international trade, the risk that exchange rates will change after a company has agreed to a transaction but before it is accomplished, such that it adversely affects the transaction. For example, suppose an American company agrees to buy goods from a British company and settle the transaction in pounds. The American company has the transaction exposure that the pound will appreciate with respect to the U.S. dollar, causing the company to spend more dollars to buy the same number of pounds to be able to settle the transaction.
The risk of loss caused by changes in currency exchange rates when a company's payables and receivables are denominated in a foreign currency. Derivatives are used to hedge against changes in currency exchange rates and reduce transaction exposure.