Professional Documents
Culture Documents
Lecturer
:
Ahalik, SE, Ak, M.Si, M.Ak, CMA, CPMA, CPSAK, CPA, DipIFR, CA
FOREIGN CURRENCY CONCEPT AND TRANSACTION
Distinguish between measurement and denomination in a particular
currency
A receivable or payable is denominated in a currency when it must be paid
in that currency.
A receivable or payable is measured in a currency when it is recorded in
the financial records in that currency
A transaction is measured in a particular currency if its magnitude is
expressed in that currency. Assets and liabilities are denominated in a
currency if their amounts are fixed in terms of that currency.
Assume that one Canadian Dollar can be exchanged for $.72 U.S. dollar.
What is the exchange rate if the exchange rate is quoted directly?
Indirectly?
Direct quotation: .72/1 = $.72 (from viewpoint of American Company)
Indirect quotation: 1/.72 = 1.3889 Canadian dollars (from viewpoint of
American Company)
What is the difference between official and floating foreign exchange rate?
Official or fixed rates are set by a government and do not change as a
result of changes in world currency markets. Free or floating exchange
rates are those that reflect fluctuating market prices for currency based on
supply and demand factors in world currency markets.
Spot rates are the exchange rates for immediate delivery of currencies
exchanged. The current rate for foreign currency transactions is the spot
rate in effect for immediate settlement of the amounts denominated in
foreign currency at the balance sheet date. Historical rates are the rates
that were in effect on the date that a particular event or transaction
occurred.
When are exchange gains and Losses reflected in a businesss financial
statement?
Exchange gains and losses occur because of changes in the exchange
rates between the transaction date and the date of settlement. Both
exchange gains and exchange losses can occur in either foreign import
activities or foreign export activities.
2014
Case II (Forward & Hedging)
Hedging an Unrecognized Foreign Currency Firm
Commitment : A Foreign Currency Fair Value Hedge
1. On August 1, 2006, President Co. contracts to
purchase special-order goods from Tokyo
Industries. Their manufacture and delivery will
take place in 60 days (on October 1, 2006). The
contract price is 2.000.000 Yen, to be paid by
April 1, 2007, which is 180 days after delivery.
2. On August 1, President hedges its foreign
currency payable commitment with a forward
exchange contract to receive 2.000.000 Yen in
240 days (the 60 days until delivery plus 180
days of credit period). The future rate for a 240
day forward contract is $.0073 to 1 Yen. The
purpose of this 240 day forward exchange
contract is twofold. First, for the 60 days from
August 1, 2006, until October 1, 2006, the
forward exchange contract is a hedge of an
identifiable foreign currency commitment. For the
180 day period from October 1, 2006 , until April
1, 2007, the forward exchange contract is a
hedge of a Foreign currency exposed net liability
position.
The relevant exchange rates for this example are as
follows :
Date
Illustration :
Green company mines copper. It will mine and sell
100.000 pounds of copper during the next four
quarter. Total costs is $28.900.000 or $289 per
pounds. Green decides to sell its future production by
entering into forward contract on 1 october 2008 with
Brown for delivery to Brown 100.000 pounds of
copper in one year at a price of $300 per pound.
1 oct 2008 - no journal entries
The company has entered into a cash flow hedge
because it is attempting to control the impact of price
fluctuations its future cash flows and its sales.
31 dec 2008, market price of copper $310
Suppose that interest rate is 1% per month
$10 x 100.000 = $1.000.000
$1.000.000 X PVIF, 1%, 9=$914.340
Other comprehensive income (OCI)(SE)
Forward contract (L)
914.340
914.340