A type of risk (specifically, a source of non-traded market risk) that arises from potential changes in a foreign exchange (FX) transaction due to currency exchange rate fluctuations after the transaction has been completed but not yet settled. Such changes in the currencies exchange rate may have negative impacts both on the valuation of the assets and liabilities in the financial statements of an entity when converted into the reporting currency and on the earnings from various types of transactions (funding, lending and investment/ disinvestment) conducted in currencies other than the reporting currency (functional currency).

This subcategory of foreign exchange risk may stem from foreign-currency denominated loans and deposits held by corporate and/ or retail customers as well as operations involving conversion of foreign exchange denominated assets, liabilities and income of the offshore branches into reporting currency. Other activities that give rise to such a risk include trading of foreign currencies; collection and/ or payment of interest, commissions, dividends and administrative expenses in foreign currencies as well as purchases and sales of securities and financial instruments (held for sale) for short term gains; etc.

Transaction foreign exchange risk may also be associated with structural foreign exchange risk. More specifically, this risk may also arise from operations that produce the type of structural foreign exchange risk as reflected, for example, in dividends approved and declared by offshore subsidiaries and that relating to the management of foreign exchange risk in connection to the management of equity investments, also including the gains/ losses of offshore branches.