Inflation, Foreign Exchange Rate and Translation Exposure

This article deals with theoretical aspects of translation exposure in connection with inflation and foreign exchange rate. The aim of the paper is to point out – using the hypothetical situation of a subsidiary whose currency is the currency of hyperinflation economy and who translates its balance sheet into currency of non-hyperinflation economy – that the closing rate method of translation can present the realistic view of the economic (market) situation of the firm only in that case when all compared items are revalued before translation by closing rate. The parent firm can reduce the translation exposure risk by hedging. Since it can use the expected items of the future balance sheet, hedging might be a problem.