Transaction risks and translation risks are two distinct types of risks that firms operating in the foreign exchange market often encounter. Transaction risks are associated with the cash inflows and outflows in a foreign currency. This type of risk arises when a firm engages in financial transactions that involve a foreign currency. The risk stems from the potential fluctuation in the foreign exchange rate between the time the transaction is initiated and when it is settled. This can lead to potential losses if the foreign exchange rate moves unfavorably. On the other hand, translation risk occurs due to exposure to foreign exchange gains and losses when the assets and liabilities dominated in a foreign currency are exchanged into the domestic currency to generate financial statements. This type of risk arises when a firm's financial statements, which include assets and liabilities denominated in foreign currencies, need to be converted back into the firm's domestic currency. If the foreign exchange rate has moved unfavorably, this can lead to potential losses on the firm's financial statements.

Choice A is incorrect. Transaction risks are not prone to transactions that are aligned to domestic currency. Instead, they occur due to cash inflows and outflows in a foreign currency. On the other hand, translation risk does not arise due to transactions aligned to foreign currency but occurs due to exposure to FX gains and losses when the assets and liabilities dominated in a foreign currency are exchanged into domestic currency for generating financial statements.

Choice C is incorrect. This choice incorrectly swaps the definitions of transaction risk and translation risk. Translation risks do not arise from cash inflows and outflows in a foreign currency; instead, they arise from the conversion of foreign-currency-denominated assets and liabilities into the reporting (domestic) currency for financial statement preparation.