Translation risk

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Foreign exchange risk

Translation exposure refers to foreign exchange or currency risk. It is the risk of adverse effects in a firm’s reported financial statements, or related financial ratios or borrowing covenant compliance, resulting from changes in the rates at which foreign currency-denominated assets, liabilities, income or costs are translated into the reporting currency.

This applies most commonly to the translation of monetary assets and liabilities and to the consolidation of non-domestic subsidiaries into group financial statements. If the changes in exchange rates were to reverse, the effects on the related amounts in the financial statements would normally also reverse.

Also known as translation exposure, translational risk or translational exposure.

See also

Other links

Treasury essentials: Translation Risk, Will Spinney, The Treasurer, Nov 2013