Currency exposure is the measure of potential future loss resulting from exchange rate fluctuations. There are three main types of currency exposure: transaction exposure accounting exposure operating exposure Transaction exposure reflects future FX-denominated cash flows that result from existing sales or purchase orders (SO/PO), whether or not the corresponding receivables/payables have been created. For example, a European food processing company sells in USD to a Chinese customer. As the EUR-USD rate fluctuates between now and the moment of settlement, currency gains and losses occur. When the corresponding trade receivable is created and recognised on the balance sheet, the transaction exposure becomes part of the accounting exposure. Accounting exposure reflects changes in income statement and balance sheet items caused by currency fluctuations. FX gains and losses are determined by accounting rules. The measurement of accounting exposure is based on activities that occurred in the past. Operating exposure measures the extent to which currency fluctuations alter the firm’s future operating cash flows, that is, its future revenues and costs. Operating exposure may arise even in a firm with cash flows denominated only in its home currency, if costs and/or price competitiveness are affected by FX fluctuations. Finally, economic exposure comprises the two cash flow exposures: transaction exposure and operating exposure.