A UK company has a subsidiary in another country. When the subsidiary's statement of financial position is converted into sterling for the group accounts, a loss arises because the foreign currency has weakened. Which type of foreign currency risk is this?

Correct answer: A) Translation risk

Explanation

Translation risk is the risk of gains or losses when the results and net assets of foreign operations are translated into the reporting currency. It is an accounting exposure with no immediate cash flow effect. Transaction risk affects individual foreign currency receipts and payments, and economic risk is the long-term effect of exchange rate movements on the value of the company.