Explain balance sheet exposure, and discuss how it differs from transaction exposure.

Explain balance sheet exposure, and discuss how it differs from transaction exposure.

Expert Solution

Transaction exposure impacts a foreign exchange transaction cash flow whereas Balance sheet exposure has an impact on the valuation of assets & liabilities shown in balance sheet.

Difference between Transaction and Balance sheet exposure covering the following points of difference.
Accounting treatment	Transaction exposure impacts the cash flow movement and arises while conducting purchase and sale transactions in different currencies.	Balance sheet exposure is not a cash flow change and arises as a result of consolidating results of a foreign subsidiary. Translation exposure is usually driven by legal requirement asking the parent company to consolidate financials
Gain or Loss	Transaction exposure results in realized gain or losses	Balance sheet exposure results in notional / book gain or losses
Timing Impact	Transaction exposure arises the moment a company enters into a transaction involving foreign currency and commits to make or receive payment in currency other than its domestic currency	Balance sheet exposure arises on the balance sheet consolidation date and is at the end of a given financial period.

ekkarill92 answered 1 year ago

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