Difference between translation and transaction risk

CFA Level III
#1

Can someone Plz explain in simple terms,

if I sell currency to hedge investment, which one is it?

If I enter a forward contract, then??

thanks!!

#2

Translation risk - is currency risk on your asset value in accounting term or principal value of asset invested in foreign currency Transaction risk - is currency risk on cash that will receipt or paid in specific time IMO , please correct me

#3

That’s right

Remember translation risk is what you studied in level 2 in the accounting section

#4

Translation risk is based on translating assets on balance sheet in foreign currency to domestic currency. Stricly speaking there is no actual loss/gain per se here.

Transaction risk is based on actual transactions. Either in paying or receiving foreign currencies. Thus transaction risk can be easily hedged if you known in advance the (1) timing and the (2) amount of the payment/receipt.

#5

thanks. So if I just short the principal amount at inception, I am hedging out transaction risk. correct?