a) i) Transaction exposure
This relates to the gains or losses to be made when settlement takes place at some future date of a foreign currency denominated contract that has already been entered into. It arises due to credit imports and exports denominated in a foreign currency.
ii) Translation exposure
This arises from the need to consolidate worldwide operations according to predetermined accounting rules. Assets, liabilities, revenues and expenses must be restated in home currency terms in order to be consolidated into group accounts. The depreciation of host currency will reduce value of consolidated assets and liabilities.
iii) Economic exposure
This relates to the possibility that the value of the company (the present value of all future cash flows) will change due to unexpected changes in future exchange rates. The volatility of exchange rate will affect the magnitude and uncertainity of future cashflows.