practice exam says " Translation risk refers to the effect of exchange rate changes on the income statement and balance sheet ,and is often not hedged. " it is true to say not hedged?
I noticed that translation risk is mentioned in two different SS in the curriculum. It is either defined as in the practice exam you’re referring to, and in that case it is not hedged. Or it is defined as in R46 (reading on minimum variance hedge, etc) - in that case it is hedged.
There’s one section that discusses only translation and economic risk. There’s another section that discusses translation, economic and transaction risks.
translation risk is generally not hedged as its a waste of money - any good analyst/CFO knows that the value of your assets in a forgien country will fluctuate based on exchange rates at a given point in time. If you hedge how they show up on a balance sheet you’re essentially wasting your money. There are always exceptions, but this is the general case. Transaction risk is the FX risk that IS generally hedged.