Implementing a forward or money market hedge to hedge translation exposure may increase transaction exposure.

Question

Quizplus · Accepted Answer

Implementing a forward or money market hedge to hedge translation exposure involves entering into transactions that directly affect the value of the company's home currency. This can increase the company's exposure to transaction risk, which arises from fluctuations in exchange rates between the time a transaction is initiated and settled. For example, if a company enters into a forward contract to sell foreign currency at a fixed exchange rate, it may have to buy back the same amount of currency at a different rate to settle the transaction, resulting in transaction risk.

Implementing a Forward or Money Market Hedge to Hedge Translation