Transaction risk is a risk that a company will face regarding the losses that will incur due to the money loss in a transaction occurring in multiple currencies due to some exchange rate movements.
Most of the companies that are involved in the transactions occurring around the globe often deal in more than one currencies. While executing these transactions the companies must repatriate different kinds of foreign currencies that are received as the payment. The repatriation occurs at the current market rate and there is loads of vulnerability of fluctuations of the prices. In these transactions a generic lag exists between the execution and the settlement. In this respect the transaction risk can be defined as a risk that describes the degree at which the exchange rate will fluctuate during this kind of lag. This may result in the serious losses in terms of money for the company in question.
In order to understand this concept just assumes that there is a three day lag between the settlement and the execution of the transaction. The company is receiving the payment in Great Britain Pound and the payment must be repatriate into US dollar that is the local currency of the company. Now the transaction risk is that risk that GBD-USD exchange rates will decrease during these three days resulting in the loss for the company.
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