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

This scenario describes a transaction exposure, not a translation exposure. Transaction exposure arises from the effect of exchange rate changes on the value of a company's financial transactions, while translation exposure relates to the impact on financial statements when consolidating foreign subsidiaries.

The Following Describes a Translation Exposure of Exchange Rate Risk