The following describes a translation exposure of exchange rate risk. You sell custom-designed refrigerators in Canada. The refrigerators are manufactured in Mexico and it takes about 60 days from the time you agree to a sale and accept payment in Canada until you take delivery of the refrigerator and pay the Mexican firm. Your profit, therefore, is affected by changes in the dollar/peso exchange rate between the order and delivery dates.

Question

Quizplus · Accepted Answer

The scenario described is an example of transaction exposure, not translation exposure. Transaction exposure arises from the effect of exchange rate changes on the value of a company's future cash transactions, such as receivables or payables, resulting from sales or purchases in foreign currencies. Translation exposure, on the other hand, relates to the impact of exchange rate changes on the reported financial statements of a company, particularly when consolidating foreign subsidiaries.

The Following Describes a Translation Exposure of Exchange Rate Risk