Differentiate between transaction and translation risks. Explain how these risks affect firms and investors.
Differentiate between transaction and translation risks. Explain how these risks affect firms and investors.
Homework Answers
A transaction is generally the process of exchanging one currency for the other. Translation risk is the risk associated with the exchange rate that deals with foreign currencies or list of foreign assets on their balance sheets. A domestic country investing in foreign assets ultimately has to convert into their domestic currency and if exchange rates are fluctuating it implies changes in the value of the foreign assets. This indicates risk for the company as the amount of transaction is not predefined. The greater the value of company's foreign assets more will be its transaction risk.
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Differentiate between transaction and translation risks. Explain
how these risks affect firms and investors.
Carefully explain the primary differences between the losses from transaction exposure and the losses from translation exposure.
Carefully explain the primary differences between the losses from transaction exposure and the losses from translation exposure.
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Discuss some examples of economic and transaction exposures for international firms. How do firms mitigate these risks?
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