Differentiate between transaction and translation risks Expl

Differentiate between transaction and translation risks. Explain how these risks affect firms and investors.

Solution

Following are the difference between transaction and transactional risk---------------------

1. Transaction risk is the type of exchang rate risk resulting from the time lag between the entering into the contract and settling the contract. Translation risk is also the exchange rate risk that come from converting financial results of one currency to another currency.

2. Trasaction risk can be mitigated but translation risk cannot be mitigated.

3. there is also an actual change in the future outcomes in the tranaction risk but there is no actual change in translation risk.

4. when the contract is entered to in present and that will be setteled in future date , the risk which arise is due to transaction risk.

5. Translation risk is incurred by the companies who operated his business in the multiple countries.