Translation exposure, also known accounting exposure, refers to a kind of effect occurring for an unanticipated change in exchange rates. It can affect the consolidated financial reports of an MNC.
From a firm’s point of view, when exchange rates change, the probable value of a foreign subsidiary’s assets and liabilities expressed in a foreign currency will also change.
There are mechanical means for managing the consolidation process for firms that have to deal with exchange rate changes. These are the management techniques for translation exposure.
We have discussed transaction exposure and the ways to manage it. It is interesting to note that some items that create transaction exposure are also responsible for creating translation exposure.