Which statement differentiates transaction exposure from translation exposure?

Which statement differentiates transaction exposure from translation exposure?

• A. Transaction exposure arises from actual cash flows in foreign currencies; translation exposure arises from converting foreign subsidiary accounts for consolidated statements
• B. Translation exposure arises from actual cash flows in foreign currencies
• C. Both are the same
• D. Transaction exposure only affects assets

Answer: (A)

Transaction exposure vs translation exposure deals with two different ways exchange-rate movements affect a multinational company. Transaction exposure arises from actual foreign-currency-denominated cash flows—receipts and payments in foreign currencies—so changes in exchange rates can alter the value of those cash flows and the related profit or loss. Translation exposure, on the other hand, occurs when foreign subsidiary financial statements must be translated into the parent company’s reporting currency for consolidation; exchange-rate movements change the reported assets, liabilities, and equity, even if no cash actually moves. So, the statement that transaction exposure comes from actual cash flows in foreign currencies and translation exposure comes from converting foreign subsidiary accounts for consolidated statements correctly captures the core distinction. The other options misstate the sources or scope: translation exposure is not driven by cash flows, transaction exposure is not limited to assets, and the two exposures are not the same.

Transaction exposure vs translation exposure deals with two different ways exchange-rate movements affect a multinational company. Transaction exposure arises from actual foreign-currency-denominated cash flows—receipts and payments in foreign currencies—so changes in exchange rates can alter the value of those cash flows and the related profit or loss. Translation exposure, on the other hand, occurs when foreign subsidiary financial statements must be translated into the parent company’s reporting currency for consolidation; exchange-rate movements change the reported assets, liabilities, and equity, even if no cash actually moves.

So, the statement that transaction exposure comes from actual cash flows in foreign currencies and translation exposure comes from converting foreign subsidiary accounts for consolidated statements correctly captures the core distinction. The other options misstate the sources or scope: translation exposure is not driven by cash flows, transaction exposure is not limited to assets, and the two exposures are not the same.