Translation Exposure

Meaning of Translation Exposure

Translation exposure is a risk of the value of a company’s assets, equities, income or liabilities changing due to fluctuations in exchange rates. Firms which denominate a portion of their assets, liabilities, and equities in a foreign currency face this risk.

Translation exposure is mainly faced by multinationals as their operations and assets are based in foreign currencies. Firms that produce goods or services that are sold in foreign markets are also affected by this risk.

On knowing the meaning of translation exposure, let us have a look at how to measure the same.

Measuring Translation Exposure

The following are the methods of measuring translation exposure:

Current/Noncurrent Method

Current assets and liabilities having a maturity of one year or lesser are translated at the current exchange rate. Noncurrent assets and liabilities are converted at the past exchange rate that prevailed at the time the asset or liability was recorded in the books. Under this method, a foreign subsidiary owning current assets in excess of the current liabilities will incur a translation gain if the local currency appreciates. The income items are usually calculated at the prevailing exchange rate. While, the depreciating items, falling under non-current items are calculated at the historical exchange rate.

Translation Exposure

Monetary/Nonmonetary Method

In this method, all monetary balance sheet accounts such as cash, notes payable, accounts payable and marketable securities of a foreign subsidiary are converted at the current exchange rate. The remaining nonmonetary balance sheet accounts and shareholder’s equity are converted at the past exchange rate when the account was recorded. This method works on the philosophy that monetary accounts are similar as their value is equivalent to an amount of money, the value of which changes with fluctuations in exchange rates. The monetary/nonmonetary method categorizes accounts on the basis of similarities of attributes rather than maturities.

Temporal Method

In the temporal method, monetary accounts, both current and noncurrent, such as receivables, payables, and cash are converted at the current exchange rate. The other balance sheet accounts if carried out on the books at current value are converted at the current rate. However, if they are carried out in the past, they are converted into the historical rate of exchange that prevailed during that time. Cost of goods sold and depreciation are converted at the historic rates if the balance sheet accounts associated with it were carried out at historical costs.

Current Rate Method

Under this method, all balance sheet accounts except for stockholder’s equity, are converted at the prevailing current exchange rate. The income statement items are converted at the existing exchange rate on the dates the items are recognized.

After gaining an insight on measuring translation exposure, we will now have a look at how to manage the same.

Translation Exposure Management

The following are the ways to manage or hedge translation exposure:

Currency Swaps

Currency swaps are a settlement between two entities to exchange cash flows denominated for a particular currency for a fixed time frame. Currency amounts are swapped for a predetermined period and interest is paid during that time span.

Currency Options

The Currency option gives the right to the party to exchange the amount of a particular currency at an agreed exchange rate. However, the party is not obligated to do so. Nevertheless, the transactions must be conducted on or before a set date in the future.

Forward Contracts

Under the forward contracts, two entities fix a specific exchange rate for the interchange of two currencies for a future date. The settlement for the agreed amount of currencies is conducted on the particular future date which is pre-decided.


Translation exposure is bound to take place in entities having foreign operations or dealing with foreign currencies. Nevertheless, there are ways which can be adopted to mitigate the exposure risk involved.


Last updated on : November 20th, 2017
What’s your view on this? Share it in comments below.

Leave a Reply

International vs. Domestic Finance
  • International Financial Management
    International Financial Management
  • Types of Foreign Exchange (Currency) Exposure – Transaction, Translation and Economic Exposure
    Types of Foreign Exchange (Currency) Exposure
  • Bill of Lading and its Types
    Bill of Lading and its Types
  • International Financial Markets
    International Financial Markets
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook

    Related pages

    myron birdlessee accountingpv and fv formulasexchange bill of ladinggross margin ratio interpretationocean bill of lading formthe use of cash budgeting procedurestypes bill of ladingmarketable securities examples balance sheetpvifa formulastatutory merger definitiongaap impairmentshareholder value added analysisaccounts receivable turnover ratio measuresinstallment sales agreementdcf model formulaaffirmative covenantthe contribution margin per unit is equal to thelt debt to equity ratioroe leverageaccounts receivable turnover rationtypes of debenturesadvantages of activity based costingmaximizing profit formulaconvertible debentures meaningtotal asset ratio formulacalculate stock price based on dividendscallable preference sharesinventory turnover ratio analysis interpretationoverdraft vs loancapital budgeting npv exampleadvantages and disadvantages of letter writingirredeemable debt definitionline item budgeting definitiongaap software depreciationcapital lease vs operating lease accountinggaap capitalization ruleshow to calculate ebitreceivable turnover analysisopportunity cost in capital budgetinglessor lessee meaninginternal rate of return definition and examplezero based budgeting pros and conssales forecasting regression analysisredeem preferred sharesdirect variable cost definitionaverage stock turnover periodearning per share calculatordividend policies of companiesprofitability ratios formulairr formula exampleimpairments financetod letter for bankexamples of marginal costingdupont case analysisstock turnover ratio exampledefinition of debenture bondsimportance of capital budgeting techniquesdifference between stakeholders and stockholdersgoodwill is a fixed assetmeaning of equity financeinvoice discounting indiawhat does a negative irr meanhow to compute wacctax shield depreciationwacc formula with preferred stockfinweb.comdebenture definition businesshow do you check your indirects on twitterfinancial leverage investopediacapital budgeting formuladegree of operating leverage accountingdefinition owners equityinvesting in debenturestobin's qdirect financing lease examplecomputation of payback perioddifference between stakeholder and shareholderzero balance budgetingtakeover defense mergers and acquisitions