The company can adopt specific strategies to reduce its exposure to specific risks, for example partnering with a local firm to reduce governmental risk. Dealing with broad-based country exposure and by extension translational risk, however, is more complicated. One of the best ways to approach the issue is through diversification. For larger countries, however, it may be difficult to deal with exposure.
The best approach to unhedgeable translational risk is to ensure that adverse currency movements are not going to do significant damage to the company. The company's balance sheet should be far from loan covenants (Amin, 2006). The company should be able to explain to shareholders if translation impacts more than a few cents per share. If this is not the case, then the company needs to find ways to hedge that translational risk by earning extra profit in the foreign currency.
Conclusions. Translational risk arises from transactions that take place in foreign currencies,...
The consequences may be entirely paper-based but can impact on the firm's profits, its loans, and its taxes. As a result, it is important for firms to identify their translational risk and attempt to hedge it. Firms should also understand the full nature of their country exposure -- for example the ways in which government risk or economic risk interacts with their currency exchange rate risk.
Works Cited:
Watkins, T. (no date). Accounting or translation risk exposure. San Jose State University. Retrieved April 22, 2010 from http://www.sjsu.edu/faculty/watkins/accountrisk.htm
Amin, M. (2006). Should companies hedge against translation risk? Price Waterhouse Coopers. Retrieved April 22, 2010 from http://pwc.blogs.com/finance_and_treasury/files/Translation_risk_hedging_paper_260506.pdf
Pugel, T. (2009). International Economics. McGraw-Hill.Higher Education
