A simple example of transaction exposure Suppose that Falcon Co., a U. S.-based MNC that sells bird food, seeks to evaluate its transaction exposure over the next quarter. There is only one transaction denominated in foreign currency over the next quarter, which is an order from the U. K. that will result in Falcon Co. receiving 40,000 pounds in exchange for bird food. The current dollar exchange rate of the pound is $1.50, but the MNC wants to analyze the sensitivity of this receivable for different exchange rates. In the following table, write the dollar value of the pounds received by Falcon Co. under the 3 possible values for the exchange rate.
Possible Exchange Pounds Received in Dollar Value of Pounds
Rate in One Quarter One Quarter Received
$1.40 40,000 pounds
$ $1.50 40,000 pounds $
$1.60 40,000 pounds
If Falcon Co. believes the pound will appreciate over the next quarter to $1.60, the firm likely hedge this transaction exposure.