Translation risk definition
/What is Translation Risk?
Translation risk is the risk of incurring losses when there are adverse changes in exchange rates. Translation risk can arise in the following circumstances:
When you pay a supplier in another currency. If the payment is scheduled for a future date, and if the exchange rate for this currency increases in the interim, then you will sustain a loss on the currency translation.
When you receive a payment in a different currency. If the payment is scheduled for a future date, and if the exchange rate for this currency declines in the interim, then you will sustain a loss on the currency translation.
When you hold assets denominated in a foreign currency. If you eventually liquidate these assets and then convert the proceeds into your home currency, this will result in a currency translation loss if the exchange rate for the currency declines in the interim.
Translation risk can be a major concern for organizations with extensive international operations. A firm that wants to mitigate its translation risk can engage in hedging transactions. Conversely, a firm that experiences a small amount of translation risk may elect to not manage the risk, resulting in modest gains or losses from its foreign currency transactions.