A transaction exchange gain or loss is triggered when there is a fluctuation in the exchange rate of two currencies that are applied to a business transaction. This is a particular risk when there is an extended period of time until a transaction is scheduled to be settled, since it leaves more time in which exchange rate fluctuations can occur.

Example of a Transaction Exchange Loss

For example, an American business commits to pay a European supplier in Euros, and the U.S. dollar weakens between the date when the supplier issues an invoice and the date when it is due for payment, causing the American company to pay more dollars to settle its obligation. The increased number of dollars required to pay the supplier is a transaction exchange loss.