1.
What factors affect a firm's degree of transaction exposure in a particular currency? For each
factor, explain the desirable characteristics that would reduce transaction exposure.
Solution
Two factors are as below:
1. Variability in currency.
2. Correlation with currency.
Desirable characteristics are as below:
Variability in currency: Reducing transaction exposure could be possible if low level is wanted.
Correlation with currency: Reducing transaction exposure could be possible if low level is
wanted for inflowing currency and high level is wanted for both inflowing and outflowing of
exchanging currencies.