Translation Exposure – An Exhibit

The following exhibit shows the transaction exposure report for Cornellia Corporation and its two affiliates. Items that produce transaction exposure are the receivables or payables. These items are expressed in a foreign currency.

AffiliateAmountAccountTranslation Exposure
ParentCD 200,000CashYes
ParentPs 3,000,000Accounts receivableNo
SpanishSF 375,000Notes payableYes

From the exhibit, it can be easily understood that the parent firm has mainly two sources of a probable transaction exposure. One is the Canadian Dollar (CD) 200,000 deposit that the firm has in a Canadian bank. Obviously, when the Canadian dollar depreciates, the deposit’s value will go down for Cornellia Corporation when changed to US dollars.

It can be noted that this deposit is also a translation exposure. It is a translation exposure for the same reason for which it is a transaction exposure. The given (Peso) Ps 3,000,000 accounts receivable is not a translation exposure due to the netting of intra-company payables and receivables. The (Swiss Franc) SF 375,000 notes for the Spanish affiliate is both a transaction and a translation exposure.

Cornellia Corporation and its affiliates can follow the steps given below to reduce its transaction exposure and translation exposure.

●      Firstly, the parent company can convert its Canadian dollars into U.S. dollar deposits.

●      Secondly, the parent organization can also request for payment of the Ps 3,000,000 the Mexican affiliate owes to it.

●      Thirdly, the Spanish affiliate can pay off, with cash, the SF 375,000 loan to the Swiss bank.

These three steps can eliminate all transaction exposure. Moreover, translation exposure will be diminished as well.

Translation Exposure Report for Cornellia Corporation and its Mexican and Spanish Affiliates (in 000 Currency Units) −

 Canadian DollarMexican PesoEuroSwiss Frank
CashCD0Ps 3,000Eu 550SF0
A/c receivable09,0001,0450
Net Fixed Assets046,0004,4000
Exposed AssetsCD0Ps 73,000Eu 7,645SF0
A/c payableCD0Ps 7,000Eu 1,364SF0
Notes payable017,0009350
Long term debt027,0003,5203,520
Exposed liabilitiesCD0Ps51,000Eu 5,819SF0
Net exposureCD0Ps22,000Eu 1,826SF0

The report shows that no translation exposure is associated with the Canadian dollar or the Swiss franc.

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