Translation (accounting) exposure arises from the need to, for purposes of reporting and consolidation, to convert the financial statements of foreign operations from the local currency (LC) involved to the home currency (HC). If exchange rates have changed since the previous reporting period, this translation, or restatement, of those assets, liabilities, revenues, expenses, gains and losses that are denominated in foreign currencies will result in foreign exchange gains or losses.
The most common means of protecting against translation exposure is balance sheet hedging. This involves attempting equalize exposed assets and liabilities. For example, a company may try to reduce its foreign currency denominated assets if it fears a devaluation of the overseas currency, by running down cash balances, chasing debtors and reducing stock levels.… Read the rest