Foreign Exchange Rate Translation Exposure

¶ … temporal and current method for assessing translational exposure.

Translational exposure describes the risk that a company's assets, liabilities, income, or equities will change due to the exchange rate change results. This is a risk that has become more common in recent decades, as we have worked to deconstruct barriers to international trade. The translational exposure risk is usually as a result of a firm's denomination of their assets, liabilities, income, or equities in foreign currency and the need to project these various assets in advance. This need promotes the demand to assess translational exposure and make decisions according to this assessment. According to our readings, there are two methods for assessing translational exposure: the temporal method and the current method.

The temporal method is used by translating exchange rates which are consistent with the timing of an item's creation (Moffett, 2012,-page 280). This, of course, promotes a risk as pricing fluctuates with each quarterly change, which is why the temporal mode also uses historical data where appropriate to make projections. Meanwhile, the current method takes into account all financial statement lines which are translated at the "current" exchange rate with few exceptions (Moffett, 2012,-page 280). There are various lines that are comparable in the temporal and current method such as: assets and liabilities. The temporal method breaks assets and liabilities into sections known as monetary assets and monetary liabilities, which are consequently translated at current exchange rates. Other assets and liabilities that are nonmonetary however are translated at their historical rates. Nevertheless, the current rate methods gather all assets and liabilities and translate them at the current exchange rate which is similar to monetary assets and liabilities but with the effect on the balance sheet date taken into consideration. Although temporal and current methods have similar approaches they differ based on standard procedure. Also, in essence, the temporal approach offers a more sophisticated and dynamic integration of both current exchange rates and historical exchange rates.

2. In your own words, describe the asset approach to determining foreign exchange rates.

In financing, the exchange rate is the formula used to determine the conversion rate of two currencies from two distinct nations or monetary systems. Because international trade has accelerated substantially in recent years, the exchange rate has become an increasing area of focus for companies operating extensively across global borders. Absent any transaction, the exchange rate can also be defined as the value of one country's currency in relation to that of another's. Foreign exchange rates (exchange rates) are typically interpreted through the foreign exchange market, which is open to a wide range of buyers and sellers of all varieties. The asset market approach argues that the exchange rate is determined by the supply and demand of a product from an international scope.

This denotes that every national participating in the global trade scheme will have the capacity to impact the exchange rate through monetary and fiscal policy, as well at through basic economic performance. This denotes that trading nations and entities create and move assets on a global scale at rate that impacts their essential value on the exchange market.

Unfortunately with all the work and research that have been passed down, it is still very difficult to forecast exchange rate values, short- and long-term (Moffett, 2012,-page 238). The asset market approach assumes that whether foreigners are willing to hold claims in monetary form depends on an extensive set of investment considerations or drivers (Moffett, 2012,-page 238). Therefore, it makes the process of predicting future trends very difficult to pursue as a lot of the reliance is on the buyers and sellers of various regions. The multitude of players on the international trading front make it especially difficult to establish a formal and reliable way of making meaningful exchange rate projections.

3. In your own words, contrast translational exposure to transactional exposure.

Translational exposure is the risk that a company's property will change in value due to a fluctuation in the exchange rates. A risk such as translational exposure typically occurs when firms denominate their assets, liabilities, equity, or income in a foreign currency. Therefore, companies will try to protect the firm's financial statements by consolidation techniques, some cost effective accounting evaluation procedures and a few more sophisticated steps which will addressed at greater length in response to Question #5. These measures aside, translational exposure will be recorded as an exchange rate gain or loss in the firm's retrospective financial statement.