Transaction exposure

This is the exposure that matters economically. A business invoicing customers in one currency while paying its workforce and suppliers in another holds a genuine mismatch, and a currency move changes what it keeps on every unit sold. It also arises on any individual receivable or payable denominated in a currency other than the entity's functional currency.

Unlike translation, nothing restates it away. Constant currency reporting adjusts for the conversion of results, not for a business whose input costs really did rise relative to its selling prices.

It can be hedged, and most exposed European corporates run a rolling forward programme covering some number of quarters ahead. What hedging buys is time rather than escape: a company hedged twelve months out has a year in which to reprice, resource or renegotiate before a sustained move reaches the margin, which is why guidance often flags a currency headwind a year before it appears in the results.

For an analyst the discipline is to work out which exposure a reported decline came from, because transaction exposure producing a margin decline is a real deterioration in the economics while a translation driven revenue decline is not. For a buyer, the equivalent exposure is the gap between agreeing a price in a foreign currency and paying it at completion.