The following describes a translation exposure of exchange rate risk. Your firm buys plumbing products in Asia and sells them in Canada at a substantial discount to plumbing products manufactured in Canada. However, the strengthening economies in Asia (projected to continue into the next decade) have increased Asian demand for their own plumbing products, pushing up local prices and damaging your ability to undercut your Canadian competitors.

Question

Quizplus · Accepted Answer

Translation exposure of exchange rate risk refers to the impact of currency exchange rate changes on a company's reported financial statements, particularly when financial statements of foreign subsidiaries are consolidated into the parent company's financial statements. The scenario described relates more directly to economic exposure, which involves changes in competitive position or operating cash flows due to exchange rate changes affecting the prices of goods and the demand for them, rather than the accounting impact of translating financial statements.

The Following Describes a Translation Exposure of Exchange Rate Risk