Question

1. You are a US firm with significant real estate holdings in Toronto. You are worried that changes in the USD to CAD exchange rate could affect your debt to equity ratio. You are worried about:
   1. Operating exposure
   2. Transaction exposure
   3. Translation exposure
   4. Repricing risk
2. You are the CFO of a Swiss firm purchasing a German firm for Euros. You have already signed a contract and will make payment and receive control of the firm in one month. You have incurred:
   1. Contingent exposure
   2. Operating exposure
   3. Translation exposure
   4. Transaction exposure

Answer 1

1. Translation exposure risk refers to a type of exchange rate risk which means that due to a change in the exchange rate, the assets or the liabilities of the firm will get impacted to a large extent so the fear of the company that a change in the exchange rate will change the complexion of its debt equity ratio is an example of translation risk.

Transaction risk exposure refers to exchange rate risk related to different transactions and they can be used while operating exposure are exposes related to change in the present value of the firm due to change in the future cash flow from an exchange rate fluctuations. So these two risks are not related to change in debt equity ratio. Repricing risk is also not related to it.

So the correct answer would be option ( C) translation exposure risk.