Question

What is the translation exposure? Is management of translation exposure more important that economic exposure? Discuss

Answer 1

INVESTING FINANCIAL ANALYSIS

Translation Exposure

REVIEWED BY WILL KENTON Updated Aug 2, 2018

What is Translation Exposure

Translation exposure is the risk that a company's equities, assets, liabilities or income will change in value as a result of exchange rate changes. This occurs when a firm denominates a portion of its equities, assets, liabilities or income in a foreign currency. It is also known as "accounting exposure.”

Accountants use various methods to insulate firms from these types of risks, such as consolidation techniques for the firm's financial statements and using the most effective cost accounting evaluation procedures. In many cases, translation exposure is recorded in financial statements as an exchange rate gain (or loss).

BREAKING DOWN Translation Exposure

Translation exposure is most evident in multinational organizations, since a portion of their operations and assets will be based in a foreign currency. It can also affect companies that produce goods or services that are sold in foreign markets even if they have no other business dealings within that country.

In order to properly report the organization's financial situation, the assets and liabilities for the whole company need to be adjusted into the home currency. Since an exchange rate can vary dramatically in a short period of time, this unknown, or risk, creates translation exposure. This risk is present whether the change in the exchange rate results in an increase or decrease of an asset's value.

Answer 2

Translation exposure is short term and can be hedged easily than economic exposure.

Explanation:

• Translation exposure also called translation risk is equities, assets, and liabilities, that change its values as a result of the exchanges rates changes.

• The accountant uses these methods to insulate these forms the type of risk. They can also lead to gain or loss thus companies tend to hedge out risks.

• The economic exposure is called as operating exposure and shows the impacts on the cash flow of the company due to the unexpected currency rate changes.  

• As they are long term in nature can affect the company's values and can prove to be difficult to hedge and is more difficult to forecast. Hence translation exposure is more essential than economic exposures.

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• brainly.in/question/8647573 answered by Arjuntomarjaat.