Transaction and Translation Exposure – Blades Company

Blades the US manufacture of roller blades is subject to transaction, and economic exposure. Nevertheless, the company is not subject to translation exposure (Wihlborg, 1980). Under economic exposure, Blades company present value of its future cash flows is influenced and inclined by changes in exchange rates. Under transaction exposure, Blades value of future cash transactions is also predisposed by changes in exchange rates. Under translation exposure, there was no exposure of Multinational consolidate financial statements with changes in exchange rates. For instance, if a firm in the U.S is payable to a British company in pounds, it will invoice a receivable in pounds so as to create an off set.

Reduction of transaction exposure

I do not think that Blades should import its components from Japan to reduce its net transaction exposure in the long run (Hagelin, & Pramborg, 2004).   Thailand and Japan currency are comparatively unstable, this affects the two associations. While Blades reduces its net transaction exposure from importing from Japan, I believe that Blades net transaction exposure will soon increase and enlarge.  Blades exporting to Thailand and importing from Japan will lead to reduction of its transaction exposure level, as the correlation of Thailand baht and Japanese yen, has also reduced. Blades Company should consider using hedging techniques to reduce its transaction exposure; transferring exposure and netting transaction exposure.

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