Abstract
The translation exposure, also called accounting exposure, is the risk and effects of currency exchange rate changes (by denomination in foreign currency) on consolidated results and balance sheet of a firm (equities, assets, liabilities and income). For instance, an organization has a $ 2 000 000 income with a 1€/$ exchange rate in year n. In year n+2, the company will make again a $ 2 000 000 income but with a 0,9€/$ exchange rate : thus, there will be a risk of currency exchange rates in case of conversion in euro.
Translation exposure differs from transaction exposure because translation exposure assesses accounting gains and losses whereas a transaction exposure measures cash realized gains and losses from a change in exchange rates. What's more, translation exposure impacts balance sheet assets, liabilities and income statement items that already exists – operating exposure will have consequences on revenue and costs associated with future sales – and transaction exposure will have repercussions on contracts already entered into but to be settle at a later date : the difference concerns the moment in time when exchange rate changes.
