Explain FX transaction vs. translation exposure.

A core Corporate Treasury interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.

THE SHORT ANSWER

Transaction: committed FX cash flows (AR in USD, AP in GBP) – hedged with forwards/options. Translation: FX impact on consolidating foreign sub financials – hedged with net investment hedges or FX debt matching. Transaction affects cash; translation affects reported equity.

WHAT INTERVIEWERS LISTEN FOR

✓Transaction exposure definition
✓Translation exposure definition
✓Hedging methods for each
✓Cash vs equity impact

COMMON MISTAKES

✗Confusing transaction with translation
✗Ignoring hedging instruments
✗Stating translation affects cash flows

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