How is foreign exchange risk translated?

Foreign exchange risk - also called FX risk, currency risk, or exchange rate risk - is the financial risk of an investment's value changing due to the changes in currency exchange rates. This also refers to the risk an investor faces when he needs to close out a long or short position in a foreign currency at a loss, due to an adverse movement in exchange rates.

fluctuation in exchange rate, change in interest rates and not opting proper hedging strategy can translate to foreign exchange risk.

I agree with Mr Ibrahim, translating  on current rate at cutoff date and average rate for P&L.

Detail translation is described by IAS 21.

Thanks for invitation,

Foreign Exchange risk is mitigated in the most cases via " Forward Contracts" between the organization and its bank. 

Companies encounter the need to translate foreign currencies when they trade in those currencies and when they have foreign operations that use different currencies. Accounting standards  insist on a consistent translation methodology so that financial reports truly reflect the underlying economic circumstances. 

simply translating the Balance sheet on current rate at cutoff date and average rate for P&L but detail translation is described by IAS 21.

The accounting standards’ methodologies employ the functional currency translation approach, which relies on the current rate method when the functional currency is the same as the local currency .In the current rate method, assets and liabilities use the current, or “spot,” exchange rate existing on the date of translation. the date on the balance sheet. The method translates equity items excluding retained earnings using the transaction date’s spot rate. Retained earnings and income statements use an average of the period’s translation rates, except when the foreign operation can identify an appropriate specific rate.

The accounting standards call for foreign operations to use the temporal, or historical, rate method when the local currency differs from the functional one. For example, a subsidiary of a Canadian company with foreign operations in a small country in which all business transpires in U.S. dollars, not the country’s local currency, would use the temporal method. When you apply the temporal rate method, you adjust income-generating assets on the balance sheet and related income statement items using historical exchange rates from transaction dates or from the date that the company last assessed the fair market value of the account. You recognize this adjustment as current earnings. According to FASB Rule 52, you also apply the temporal rate method if you operate in a hyperinflationary environment.

A company uses the monetary-nonmonetary translation method when a foreign subsidiary is highly integrated with the parent company. The goal is to represent translated amounts as if they arose from exports sent from the parent company to the subsidiary’s markets. You translate monetary assets and liabilities such as cash, accounts receivable and accounts payable using the current exchange rate. You use the historical rate when you translate nonmonetary items such as inventory, fixed assets and common stock. For example, you would use the spot rates existing at the time you purchased inventory items.