Which of the following describes the difference between transaction exposure and translation exposure?
A) Translation exposure derives from a company's foreign-currency-denominated cash flows, and transaction exposure derives from the foreign assets and liabilities being consolidated onto the parent company's financial statements.
B) Transaction exposure derives from a company's foreign-currency-denominated cash flows, and translation exposure derives from the foreign assets and liabilities being consolidated onto the parent company's financial statements.
C) Translation exposure derives from a company's forward exchange contracts, and transaction exposure derives from the foreign assets and liabilities being consolidated onto the parent company's financial statements.
D) Translation exposure derives from a company's foreign-currency-denominated cash flows, and transaction exposure derives from the company's forward exchange contracts.

Question

Quizplus · Accepted Answer

Transaction exposure refers to the risk that a company faces due to fluctuations in exchange rates during transactions involving foreign currency-denominated cash flows. Translation exposure, on the other hand, refers to the impact of exchange rate fluctuations on the financial statements of a company with foreign assets and liabilities that are consolidated onto the parent company's financial statements.

Which of the Following Describes the Difference Between Transaction Exposure