Transaction effect
Sector Deep DivesThe real margin impact of buying or selling in a currency different from the one costs are incurred in.
A retailer selling in euro but sourcing goods in dollars faces a genuine economic exposure: if the dollar strengthens, the cost of goods rises while prices do not, and gross margin compresses.
This is not presentational. Cash flow and profitability really change, which is why it is hedged with forwards and options, typically on a rolling basis covering the next several quarters.
Hedging delays the impact rather than removing it. A company hedged twelve months out has bought time to adjust pricing or sourcing, and the effect appears with a lag once the hedges roll off, which is why guidance often flags currency headwinds a year ahead.
The analytical task is separating it from translation. A margin decline caused by transaction exposure is a real deterioration; a revenue decline caused by translation is not.
Worked example
A euro reporting retailer buys 60% of its goods in dollars. The dollar strengthens 10%.
Cost of goods rises about 6% while euro selling prices are unchanged, so on a 40% gross margin, margin compresses by roughly 3.6 points. That is real cash.
Hedges covering the next twelve months delay the impact rather than removing it, which is why guidance flags currency headwinds a year before they appear in the results.