Background Note | HBS Case Collection | September 1987 (Revised November 1992)

Note on Transaction and Translation Exposure

by W. Carl Kester and Richard P. Melnick

Abstract

Describes the transaction and translation exposures that companies doing business internationally face when foreign exchange rates change. Also discusses how to measure and cover both types of exposure. Covering techniques are demonstrated using examples of forward cover, money market hedges, and options market hedges. Other covering devices, such as swaps and leads and lags, are also presented. Explains how these exposures relate to each other and what can be done to minimize overall foreign exchange risk.

Keywords: Currency Exchange Rate; International Finance;

Citation:

Kester, W. Carl, and Richard P. Melnick. "Note on Transaction and Translation Exposure." Harvard Business School Background Note 288-017, September 1987. (Revised November 1992.)