Question

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

Answer 1

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.