Question

Briefly describe the following items: 1.Transaction exposure, economic exposure and translation exposure. Which exposure is more...

Briefly describe the following items:

1.Transaction exposure, economic exposure and translation exposure. Which exposure is more relevant to multinational corporation? Please explain

2.Purchasing power parity and Interest rate parity, and their linkage.

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Answer #1

1. Transaction exposure is a type of risk exposure, which is related to foreign exchange management and these exposurrs are short term in nature and related to fluctuations in value of transactions undertaken in other currency.

Translation exposure of a firm is the level of risk exposure to which its financial reporting is impacted by exchange rate movements.

Economic exposure is a kind of risk exposure which is more related to long term exposure in which the market value of of the firm is impacted by unexpected exchange rate fluctuations.

Transaction exposure impacts the multinational corporation to the largest extent out of all three exposures because a multinational firm is very highly transacting into multiple foreign currencies as it has multiple subsidiaries abroad.

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