Translation Exposure means the risk that a company's equities, assets, liabilities or income will change in value as a result of exchange rate changes. This occurs when a firm denominates a portion of its equities, assets, liabilities or income in a foreign currency. It is also known as accounting exposure. Accountants use various methods to insulate firms from these types of risks, such as consolidation techniques for the firm's financial statements and the use of the most effective cost accounting evaluation procedures. In many cases, this exposure will be recorded in the financial statements as an exchange rate gain (or loss). Translation exposure arises from the need for purposes of reporting and consolidation to convert the financial statements of foreign subsidiaries from local currencies to the home currency. If exchange rates have changed since the previous reporting period, translation/restatement of those assets/liabilities, revenues/expenses that are denominated in foreign currencies will result in foreign exchange gains or losses. Translation adjustments are an inherent result of the process of translating a foreign entity's financial statements from the functional currency to U.S. dollars. Translation adjustments are not included in determining net income for the period but are disclosed and accumulated in a separate component of consolidated equity until sale or until complete or substantially complete liquidation of the net investment in the foreign entity takes place. Translation risk defined as accounting-based risk stemming from the translation of financial statements from one currency to another is currently addressed by roughly 35% of corporations and is not as scientific as one would estimate.  Accounting – unlike with transaction risk where one considers not applying FAS133 and let everything flow through earnings, translation risk is longer term and as such FAS 133 becomes useful/effective in reducing otherwise incurred volatility on the derivative products versus the underlying.Economics – translation risk applies to longer term events that do not immediately effect earnings or the cash-flow.  As such many make the argument against hedging translation risk as the revaluation of certain assets is not necessary as they are long term in nature and the acquisition reflects future value.  This may well be the case as projecting the cash flows that a parent company will receive from a subsidiary, and forward selling is impractical for a long term strategy.  The argument for hedging translation risk – obviously exercised by the minority today - that translation exposure hedges also reduce exposure. A possible explanation for the latter is that translation exposure approximates the exposed value of future cash flows from operations in foreign subsidiaries. If so, by hedging translation exposure, economic exposure is reduced and the company’s value more predictable, adding to the economic value of the company. WORKS CITEDhttp://fxbestpractices.com/forums/t/143.aspx Accessed July 6, 2009.