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Class: International Business Question: Compare and contrast traction and translation exposure.

Class: International Business

Question: Compare and contrast traction and translation exposure.

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Answer #1

Transaction exposure :

  • It impacts cash flow movements
  • Arises as a result of purchase and sales transactions in different countries
  • The company need not necessarily have a foreign affiliate
  • Leads to realised gain or losses
  • Starts when company enters into transaction
  • Ends when it makes or achieves payments in currency other than its domestic currency
  • Impacts on the value of the company
  • Measures gain or loss of the company

Translation exposure :

  • No impact on cash flow movements
  • Arises as a result of consolidating results of a foreign subsidiary
  • The company need to have a foreign affiliate or subsidiary
  • Leads to notional gain or losses
  • Starts on the balance sheet consolidation data
  • Ends during a given financial period
  • No impact on value of the company
  • Does not deal with actual cash flow impacts
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