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Transaction Risk includes the current and prospective risk to earnings that exchange rates will change
unfavourably over time for transactions already entered into (but not completed), or for future
transactions in which the firm is likely to have a commitment in a foreign currency. The exchange rate
risk increases proportionately with the length of time between entering into a contract and settling it
(because there is more time for the exchange rate to fluctuate).
Translation Risk is proportional to the amount of assets held in foreign currencies. It is a form of
currency risk associated with the valuation of balance sheet foreign currency assets and liabilities
between financial reporting dates. At each reporting date, the balance sheet and income statement
reflect the change in value of the foreign currency assets and liabilities due to the change in foreign
exchange rates.
Types of Forex Hedges
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