Question
When an enterprise has an unhedged receivable or payable
denominated in a foreign currency and settlement of the obligation has not yet taken place that firm is said to have:Solution
Transaction exposure refers to the risk that an enterprise faces due to fluctuations in exchange rates when it has unhedged foreign currency receivables or payables. In this situation, the firm is exposed to potential gains or losses in the future when the settlement of the obligation takes place. The fluctuation in exchange rates between the transaction date and the settlement date can impact the value of the receivable or payable in the firm's reporting currency.
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