Carefully explain the primary differences between the losses from transaction exposure and the losses from translation...

Carefully explain the primary differences between the losses from transaction exposure and the losses from translation exposure.

Solutions

Expert Solution

Transaction exposure refers to change in value of foreign transactions due to change in exchange rate. When value of transaction changes due to either the appreciation or depreciation of the foreign currency, transaction exposure will arise.

Losses from transaction exposure are losses that occurred due to change in value of cash that will be received from existing accounts receivables or payments to be made to the existing accounts payable. Here focus is on losses from an existing balance sheet item and these losses are called realized losses.

Translation exposure refers to the risk arises due to change in value of assets,liabilities and equity due to change in foreign exchange rate

Losses from translation exposure arises when there is change in the value of equity of a parent company due to change in value of any foreign investment or in the value of any foreign subsidiary due to change in foreign currency. Such losses results from change in value of any subsidiary due to the method used by subsidiary company to measure the translation exposure.

jeff jeffy answered 11 months ago

Next > < Previous

Related Solutions

Distinguish between the following types of foreign exchange exposure: Transaction exposure Economic exposure Translation exposure Given...

Distinguish between the following types of foreign exchange exposure: Transaction exposure Economic exposure Translation exposure Given 1 example for each.

How would you rank the relative importance of transaction exposure, economic exposure, and translation exposure? Explain...

How would you rank the relative importance of transaction exposure, economic exposure, and translation exposure? Explain your answer. If you are the decision maker, will you hedge translation exposure? There are two approaches of hedging: 1) hedge only when we expect an unfavorable movement in foreign exchange rate, and 2) hedge anyway regardless of our expectation of exchange rate movements. Which approach would you use and why?

Briefly describe the following items: 1.Transaction exposure, economic exposure and translation exposure. Which exposure is more...

Briefly describe the following items: 1.Transaction exposure, economic exposure and translation exposure. Which exposure is more relevant to multinational corporation? Please explain 2.Purchasing power parity and Interest rate parity, and their linkage.

Forward contracts may reduce translation exposure at the expense of increasing transaction exposure, while they are...

Forward contracts may reduce translation exposure at the expense of increasing transaction exposure, while they are sometimes used to hedge translation exposure. True or False

Find current issues on TWO of the areas covered this week (Transaction Exposure and Translation Exposure)...

Find current issues on TWO of the areas covered this week (Transaction Exposure and Translation Exposure) and post a brief description of the issues and state your position on each issue. Post links of the sources.

6. Identify whether the following create substantial transaction, operating, and/or translation exposure (or no exposure at...

6. Identify whether the following create substantial transaction, operating, and/or translation exposure (or no exposure at all) for a U.S. company, and how the company will be affected if the foreign currency depreciates. The examples will typically create more than one type of exposure. a) Budweiser sells 50 mln euro worth of beer in Germany; payment will be made in euro next October.

QUESTION 3 (25 MARKS) (a) Differentiate between Translation and Transaction Exposure (6 marks) (b) Currently the...

QUESTION 3 (a) Differentiate between Translation and Transaction Exposure (b) Currently the exchange rate is USD1.5000/GBP and the three-month forward exchange rate is USD1.5200/GBP. The three-month interest rate is 8.0% per annum in the U.S. and 5.80% in the U.K. Assume you can borrow as much as USD1,500,000 or GBP1,000,000. (i) Determine whether the interest rate parity (IRP) is currently holding. (ii) If the IRP is not holding, show the procedures you carry out covered interest arbitrage. Calculate the arbitrage...

Question