Question : What is the term used to describe the risk that changes in exchange rates will affect the value of a company's foreign investments and operations?
Option 1: Translation risk
Option 2: Systemic risk
Option 3: Country risk
Option 4: Market risk
Correct Answer:
Translation risk
Solution : The correct answer is (a) Translation risk.
Translation risk, also known as currency translation risk or accounting risk, refers to the risk that changes in exchange rates will impact the value of a company's foreign investments and operations when they are translated into the reporting currency of the company.
When a company operates in multiple currencies, it must consolidate its financial statements and translate the values of its foreign assets, liabilities, revenues, and expenses into its reporting currency for financial reporting purposes. Fluctuations in exchange rates can result in gains or losses when converting the financial statements from the foreign currency to the reporting currency.
Translation risk can have a significant impact on a company's financial performance and financial statements, especially when exchange rates are volatile or there are large exposures to foreign currencies. Companies may use various strategies to manage translation risk, such as hedging techniques, diversifying their operations across multiple currencies, or utilizing financial instruments to mitigate the impact of exchange rate fluctuations.
Related Questions
Trending Articles/News
