Concept of translation exposure to the foreign-exchange risk

Multinational companies encounter with translation type of foreign exchange risk exposure owing to the need to periodically consolidate parents' and foreign subsidiaries' financial statements. Translation exposure is determined by taking the difference between a subsidiary exposed foreign currency assets and liabilities. Exposed foreign currency balance sheet items are those items that are translated at current exchange rates. Keeping in mind the fact that translation exposure results in unrealized translation gains and losses, one may ask why are their figures considered important? Although translation gains and losses are paper character, translation exposure effects affect company ability to raise capital, stock price and key financial ratios. Hence, significant attention has to be paid to their properly measurement.