Transaction and Traselation Exposure Essay Example | Topics and Well Written Essays - 500 words

Transaction and Traselation Exposure - Essay Example s made by both the Indian and Australian subsidiary gave back less dollars on the combined income statement i.e., translation exposure, even with no earnings remitted back to the parent company (Homaifar, 2004). Jeeves (UK) plc’s combined earnings will be reduced by the translation effect brought as a result of depreciation of the British pound against the other international currencies. Because of the fact that foreign earnings are normally translated at the standard exchange rate over the financial year would eventually mean low value of foreign currencies yielding low level of combined income (Homaifar, 2004). Existence of purchasing power parity (PPP) means higher US inflation than that of Britain. Demand for Jeeves (UK) plc products may not be affected due to price inflation from US, Canada and other euro zones aimed at offsetting the British consumer capability to obtain cheaper dollars. The British consumers’ purchasing ability on Jeeves items of trade versus other country products are not affected by rise and fall in the pound value. The economic exposure of Jeeves, a heavy exporter to the euro zone would decline since no need currency exchange is vital. Likewise, translational exposure of Jeeves would decline since Britain’s economic statements will no longer need translation. (Homaifar, 2004). Multinational companies have the obligation of ensuring that they are capable of reducing risks associated with foreign exchange. This can be attributed to the undisputable fact that their earnings are reliant on the foreign exchange rates. Because foreign exchange rates can fluctuate either up or down which would mean a constructive or destructive effect on the Company’s real profit. This calls for knowledge on minimizing risks associated with the exchange rates if they are to maximize on their profits and increase company’s equity (Homaifar, 2004). Certain strategies employed by a company to minimize foreign exchange risks include, but not restricted