Although forward contracts may reduce translation exposure at the expense of increasing transaction exposure, they are sometimes used to hedge translation exposure.

Question

Quizplus · Accepted Answer

Although forward contracts primarily hedge transaction exposure, they can also be used to hedge translation exposure by locking in a fixed exchange rate for a future period, thereby reducing the uncertainty of future cash flows from translating foreign currency denominated assets and liabilities into the parent company's reporting currency. However, using forward contracts to hedge translation exposure may also increase transaction exposure if the company needs to unwind or roll over the forward contracts before the translation date.

Although Forward Contracts May Reduce Translation Exposure at the Expense