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Contractual Exposure

In: Exchange Rates and the Firm

Author

Listed:
  • Richard Friberg

    (Stockholm School of Economics)

Abstract

Contractual exposure (or transaction exposure) is the sensitivity of future cash flows to exchange rate changes due to past contractual undertakings. That is, it will be the net of accounts receivable and accounts payable (and loan payments) in foreign currencies. Take a simple example. You are the manager of a British firm. You have previously sold some Stilton cheese to a German firm, but since the German firm had three months’ trade credit you will receive the 100,000 D-marks on, say, 30 May. You have also imported some sauerkraut from Germany, the payment for which, 50,000 D-marks, is due on the same date. What is the contractual exposure of this firm to the D-mark? Simply, the net of receivables and payables, that is, 50,000 D-marks. An ongoing firm will typically have in- and outflows at many different dates; one can then calculate the contractual exposure for each date.

Suggested Citation

  • Richard Friberg, 1999. "Contractual Exposure," Palgrave Macmillan Books, in: Exchange Rates and the Firm, chapter 8, pages 54-56, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-333-98237-2_8
    DOI: 10.1057/9780333982372_8
    as

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