Which FX risk can be mitigated by netting assets?

Which FX risk can be mitigated by netting assets?

• A. Translation risk
• B. Economic risk
• C. Transaction risk
• D. Interest rate risk

Answer: (A)

Netting assets reduces the amount of foreign currency that has to be translated when the group’s financial statements are consolidated. When a parent and its subsidiary hold intercompany balances in the same currency, those balances can be offset, so the net position in that currency is smaller. This lowers the foreign currency amount that must be translated into the parent’s reporting currency at each reporting date, reducing the impact of exchange rate movements on reported earnings and equity. This directly addresses translation risk—the risk that exchange rate movements will alter the values shown in consolidated financial statements. Other FX risks involve actual cash flows or longer-term competitiveness, which aren’t primarily mitigated by netting intercompany assets.

Netting assets reduces the amount of foreign currency that has to be translated when the group’s financial statements are consolidated. When a parent and its subsidiary hold intercompany balances in the same currency, those balances can be offset, so the net position in that currency is smaller. This lowers the foreign currency amount that must be translated into the parent’s reporting currency at each reporting date, reducing the impact of exchange rate movements on reported earnings and equity.

This directly addresses translation risk—the risk that exchange rate movements will alter the values shown in consolidated financial statements. Other FX risks involve actual cash flows or longer-term competitiveness, which aren’t primarily mitigated by netting intercompany assets.