Chapter 10

1 Topic 10 - Heading
Chapter 10 Foreign Currency

Transactions
2 Denominated Currency - Heading
Denominated Currency
3 Denominated Currency - #1
2 Cos from 2 nations transact business

In whose currency is payment made?
Called Denominated Currency
E.g., American retailer buys from French
supplier
Is payment in s or US$s?
Denominated Currency is important

Decides who bears risk (gets benefit) from
change in currency exchange rates
1st Rule: Whoever views denominated

currency as foreign gets FC gain/loss
E.g., assume payment will be in US$ &

US$
US buyer pays same US$s as promised
Doesnt matter to US buyer
French supplier takes US$s to bank &

converts them to s
French supplier gets less s than anticipated
French supplier suffers loss
E.g, if US$:
US buyer pays same US$s as promised
Doesnt matter to US buyer
French supplier takes US$s to bank and

converts them to s
French supplier gets more s than anticipated
French supplier has gain
E.g., assume Denominated Currency was
French supplier always receives s

anticipated
US buyer bears risk (gets benefit)
If :
US Buyer goes to bank to get s to pay Fr Supplier
US Buyer has to pay more US$ to get amount of owed
US Buyer suffers loss
8 Exchange Rate Quotations - Heading
Exchange Rate Quotations
9 Exchange Rate Quotations - #1
FC values can be given with a Direct

Quote
Giving what FC is worth in US$
E.g., 1 = U.S.$ 1.50
British Pound exchange rate is quoted this
way in US
FC values can be given with an Indirect

Quote
Not saying what 1 unit of FC is worth
Saying what 1 unit of US$ is worth in FC
Thereby indirectly giving what 1 unit of FC is worth
Most FC exchange rates are quoted this way

in US
E.g., Japans Yen is usually quoted as:
US$ 1 = 121
E.g. of Both Types of Quotations:
Direct Exchange Rate
Indirect Exchange Rate
1 = US$ 1.05303
US$ 1= 0.949639
12 Foreign Currency Contracts - Heading
Current Contracts To Exchange Foreign Currency in Future
Two types of exchange rates

Spot rate
Price for FC you pay/get for immediate delivery
of FC
Can have up to 2 days to deliver
Forward rate
Price for FC you pay/get if:
You make binding contract today
Delivery of FC occurs at future time
E.g., delivery in 30 to 180 days
14 Foreign Currency Contracts - #1
Forward Contract
You enter contract binding today to buy/sell
FC for delivery of FC at future time
Can be any time period not just 30-day intervals
E.g., US retailer buys wine from Fr

supplier
Denominated Currency
US retailer bears risk
Denominated Currency is foreign
US retailer may want to avoid risk

Goes to FC Broker
Says:
I will need FC 3 months from now.
I am afraid what FC will cost me 3 months from now.
Will you agree to sell me the FC I will need for delivery 3
months from now?
Will you agree to set the price now?
Enters Forward Contract

US Buyer agrees to buy needed FC
FC will be delivered when needed to pay Fr
supplier
US Buyer locks in exchange rate today
This is a Hedge
If FCs price goes up, US Buyer has locked in
lower price. Avoids loss
BUT, if FCs price goes down, US Buyer has
locked in higher price . Avoids gain
With a Hedge
No risk
17 Calculating Forward Exchange Rates - Heading
Calculating Forward Exchange Rates
18 Calculating Forward Exchange Rates - #1
Forward rates are affected by a number of

things including political & economic
environments
Here, we want to discuss fact that Forward
rates are affected by interest rate
differences between the 2 countries
involved
Consider how interest difference affects

forward rates:
US banks pay 2% interest
Foreign Country banks pay 10% interest rate
Todays Spot Rate
Indirect Quote: US$ 1 = FC 2
Direct Quote: 1FC = $ .50
We are interested in exchange rates after one

year
At start of year US$1 = FC 2
What these amounts turn into after 1 year should
be equal as well
If not, you could arbitrage
Beg of year: FC 2 End of year: FC 2.20

Beg of year: US$ 1.00 End of year: US$ 1.02
If you assume that what amounts turn into is still
equal After one year: US$ 1.02 = FC 2.20
1.02/1.02 = 2.20/1.02
Indirect Quote: US$ 1 = FC 2.157
2.20/2.20 = 1.02/2.2
Direct Quote: 1 FC = $ .4636
Following formula gives forward rate

USING DIRECT QUOTES
Interest rates given for forward periods in question
(not necessarily annual periods)
E.g., 10% for year 5% for 6 months
Forward
Rate
Spot
Rate
U.S.
Interest
Rate
Foreign
Interest
Rate
.4636
= .50
(1.02
/ 1.10)
1 year
.4810
= .50
(1.01
/ 1.05)
6 months
22 Two Transactions Treatment - Heading
Two Transactions Treatment
23 Two Transactions Treatment - #1
If contract with foreign Co & Denominated

Currency is US$ No special treatment
We dont care about nationality of business
partners
If Denominated Currency is FC
Doesnt matter with whom US Co is dealing
US company exposed to foreign currency risk
Requires special accounting treatment
Divide business transaction into 2

separate transactions
1st transaction underlying business
transaction
Record Sale/Purchase as usual
A/R or A/P is in FC
Use current Spot Rate to calculate amount of A/R or A/P
You cant put down an A/R as 1,000
All numbers in our books are in US$
2nd transaction settlement of AR/AP

A/R or A/P is orig recorded at spot rate when
transaction recorded
Payment happens later
When payment occurs, you record the payment
using the spot rate at the time that payment is
made
Difference between the orig A/R or A/P amount &
final payment amount is gain/loss
26 Two Transactions Treatment E.g. - #1
E.g., Assume US seller / Foreign buyer &

Denominated Currency is FC
Foreign Buyer owes FC 50
Rate at Sale: US$1 = FC 50
Rate when Foreign Buyer pays A/R:
US$ 1 = FC 40
When A/R paid US Seller gets FC 50
US Seller takes FC50 to bank & gets US$1.25
US seller expected $1 (using rate at time of
contract)
US seller has gain
On Sale US Seller books:

D.
A/R
C.
$1.00
Sales Revenue
$1.00
On Payment of A/R US Seller books:

D.
Cash
C.
A/R
Exchange Gain
$1.25
$1.00
.25
E.g., Assume US seller / Foreign buyer &

Denominated Currency is FC
Foreign Buyer owes FC 50
Rate at Sale: US$1 = FC 50
Rate when Foreign Buyer pays A/R:
US$ 1 = FC 60
When A/R paid US Seller gets FC 50
US Seller takes FC50 to bank & gets US$.83
US seller expected $1 (using rate at time of
contract)
US seller has loss
On Sale US Seller books:

D.
A/R
C.
$1.00
Sales Revenue
$1.00
On Payment of A/R US Seller books:

D.
Cash
Exchange Loss
C.
A/R
$.833
.167
$1.00
30 Two Rules - Summary
Two Rules:
Rule #1 WHO GETS GAIN/LOSS: Whoever
views Denominated Currency as foreign gets
gain/loss on exchange rate changes
Rule #2 IS THERE GAIN/LOSS: Change in
Buyers domestic currency determines
whether there is gain or loss
If buyers currency went up, then gain
If buyers currency went down, then loss
31 Foreign Currency Transaction Straddles 2 Years - Heading
Foreign Currency Transaction Straddles 2 Years
32 Foreign Currency Transaction Straddles 2 Years - #1
Up until now, assumed AR/AP settled

during year
AR/AP not outstanding at year end
If outstanding at year end, A/R or A/P is

marked-to-market on BS
Use Spot Rate at end of year
Change in FC value during year recorded as
gain/loss in that year
E.g., Assume
US Buyer buys inv from Foreign Supplier
A/P is for FC 1,000
Rate at time of time of purchase 1FC = 50
Rate at end of Year 1 FC = 52
Rate when US Buyer pays A/P 1 FC = 55
Create A/P (1,000FC = US$ 500 A/P):

D.
Inventory
Cr.
$500
Accounts Payable
$500
End of Year (1,000FC = US$ 520 A/P)

D.
Exchange Loss [(.52 - .50) x 1,000]

Cr.
$20
Accounts Payable
$20
Pay A/P (1,000FC = US$ 550 A/P)

D.
Accounts Payable
Exchange Loss [(.55 - .52) x 1,000]
Cr.
Cash
$520
30
$550
35 Fair Value Hedge - Asset/Liability - Heading
Hedging with Forward Contracts Protecting Receivables & Payables
36 Fair Value Hedge - Asset/Liability - #1
You can hedge against FC exchange risk

Hedging involves the use of Derivatives
Derivatives are financial instruments that
derive their value from changes in value of
related asset (e.g., FC)
Here we are going to hedge with a Forward
Contract
37
When hedging with Forward Contract 2

things going on
You have A/R or A/P tied to FC
To remove risk, you buy hedge
receivable/payable
Opposite of A/R or A/P
A/R hedge payable
A/P hedge receivable
So, you have asset & liab both tied to FC

Both go up by same amount
Both go down by same amount
No risk
Hedge
US Seller
Under Trans
$
FC pay Broker
Product FC rec
Foreign Buyer
Underlying Business Transaction: Selling Goods Using FC

Hedge: Sell FC Now That You Will Receive Later & Lock in Price of FC
Today
Hedge
US Buyer
$
FC rec Broker
Under Trans Product FC pay

Foreign Seller
Underlying Business Transaction: Buying Goods Using FC

Hedge: Buy FC Now That You Will Pay Later & Lock in Price of FC Today
40 Fair Value Hedge - Asset/Liability E.g. - #1
E.g., Assume:
US Co buying inventory for FC 100,000 when
1FC = 50
US Co afraid that FC will go up & US Co will
have to pay more than orig expected
US Co gets Forward Contract when forward
rate is 1FC = 50.6
From this we know:

US Co will pay off A/P with FC produced by
Forward Contract
A/P recorded at 1FC = 50
FC will cost US Co 1FC = 50.6
US Co will lose .6 on each FC unit
The net effect of the foreign currency gains/losses and
the hedge gains/losses will be a loss of $600.
.6 x 100,000FCs = US $600
Assume:
US Co buying inventory for FC 100,000
Current spot rate is 1FC = 50
rate is 1FC = 50.6
At Settlement:
Spot rate is 1FC = 55
We know:
A/P will lose 5 x FC100,000 = $5,000
Hedge Receivable will gain 4.4 x FC100,000 =
$4,400
$55,000 - $50,400 = $4,600
Co losses net $600 (.6 x FC 100,000)
US Co buys inventory
Value A/P using current exchange rate
(1FC = US$ .50)
D. Inventory
C. Accounts Payable (FC100,000)
$50,000
$50,000
Hedge
US Buyer
$
FC rec Broker
Under Trans Product FC pay

Foreign Seller
Underlying Business Transaction: Buying Goods Using FC

Hedge: Buy FC Now That You Will Pay Later & Lock in Price of FC Today
US Co gets forward contract:

US Co makes memo that it purchased Forward
Contract for $50,600
US Co locking in exchange rate for $600
$600 net loss (paying $50,600 to pay A/P of $50,000)
Without contract, exchange loss could be less or more
At Time of Settlement
Spot price = US$ .55
Create Forward Contract asset & record gain on

Forward Contract (Hedge Gain):
D. Forward Contract [(.55 - .506) x 100,000]
$4,400
C. Gain on Forward Contract
$4,400
Collect Foreign Currency under the Forward

Contract (Cash in Forward Contract)
US Co trades old asset (Forward Contract
Receivable) for new asset (Foreign Currency)
D. Foreign Currency
C.
$55,000
Forward Contract
$4,400
Cash
50,600
Pay A/P on original contract with Foreign

Currency asset.
The last value for liability was $50,000.
Give asset worth $55,000
Lose $5,000 (Exchange Loss)
Loss
D.
Accounts Payable
Exchange Loss [(.55 - .50) x 1,000]
C.
Foreign Currency
$50,000
5,000
$55,000
49
Hedge Example When Fiscal Year is Straddled
Assume:
US Co buying inventory for FC 100,000
Current spot rate is 1FC = 50
rate is 1FC = 50.6
At end of year:
Forward rate 1FC = 53
At Settlement:
US Co buys inventory
Value A/P using current exchange rate
(1FC = US$ .50)
D.
Inventory
C. Accounts Payable
(Obligation to Pay FC100K)
$50,000
$50,000
US Co gets forward contract:

US Co makes memo that it purchased Forward
Contract for $50,600
US Co locking in exchange rate for $600
$600 net loss (paying $50,600 to pay A/P of $50,000)
Without contract, exchange loss could be less or more
Because transaction will straddle two years, the $600
loss will be spread over two years.
At End of Fiscal Year, Original A/P
A/P on original contract is still outstanding

Now, exchange rate is 1 FC = US$ .52
US Co owes $2,000 more than before
Use to owe US$ 50,000 now owes US$ 52,000
Record Exchange Loss from increase in FC
D.
Exchange Loss
[(.52 - .50) x 100,000]
C.
Accounts Payable
$2,000
$2,000
US Co also had gain on Forward Contract

This gain is based on change in spot rates (current rates)
US Co agreed to pay US$ .506 & if US Co wanted to

make the same deal today it would have to pay US$ .
53
So US Co made 2.4 on each FC and there are
100,000FCs $2,400
(.53 - .506) x 100,000
BUT, these are FVs

US Co will get this money at time of
Settlement
Need to use PVs to calculate Gain on
Forward Contract
So, US Co made a total of $2,388 on the
Forward Contract in the 1st year
$2,400 x .995025 (PVIF) = $2,388
D. Forward Contract
C.
Gain on Forward Contract
$2,388
$2,388
At Time of Settlement
Spot price = US$ .55
What did US Co make on Forward Contract?
Forward Contract worth $4,400 ($55,000 - $50,600)
US Co locked in cheap price to buy FC (US$ .506)
That is the total gain on Forward Contract
US Co already took gain at end of last year
Only report gain for 2nd year
At end of last year, Forward Contract had gain of $2,388.
So, This years gain on Forward Contract is $2,012
$4,400 (Total) - $2,388(1st Year) = $2,012 (2nd Year)
At end of last year, Forward Contract had gain of $2,388.

So, This years gain on Forward Contract is $2,012
$4,400 (Total) - $2,388(1st Year) = $2,012 (2nd Year)
D. Forward Contract
$2,012
$2,012
Collect Foreign Currency under the Forward

Contract (Cash in Forward Contract)
US Co trades old asset (Forward Contract
Receivable) for new asset (Foreign Currency)
D. Foreign Currency
C.
$55,000
Forward Contract
$4,400
Cash
50,600
Pay A/P on original contract with Foreign

Currency asset.
The last value for liability was $52,000 at end of year.
Give asset worth $55,000
Lose $3,000 (Exchange Loss)
Loss
D.
Accounts Payable
Exchange Loss [(.55 - .52) x 100K]
C.
Foreign Currency
$52,000
3,000
$55,000
We knew on 1st day that US Co would lose $600

Last year
Foreign currency loss: -$2,000
Hedge gain: +$2,388
Net gain was $388.
This year
Foreign Currency Loss: -$3,000
Hedge Gain: +$2,012
Net loss is -$988
Together the total cost of the hedge is $600

$388 - $988 = $600
61 Fair Value Hedge Firm Commitment - Heading
Hedging With Forward Contract

Protecting a Firm Commitment
62 Fair Value Hedge Firm Commitment - #1
Before we hedged against change in value of

fixed asset/liability
A/R & A/P
US Co may want to protect itself in situation

without A/R or A/P yet
E.g.,
U.S Co signs a contract to sell super-computer that
will take months to build
Contract sets the price US Co receive in FC
In the months that pass before delivery FC may drop
in value
If so US Co will lose money
Here
There is no A/R
No formal loss will be recorded
BUT US Co will get less money than it thought at the time of
signing the contract
63 Fair Value Hedge Firm Commitment - #1
US Co can protect itself from this situation as

well
This is called hedging against a change in value
of a firm commitment
Same journal entries as before
BUT no A/R or A/P to write up/down
Instead, create acct called Firm Commitment to use in
place of A/R or A/P
When delivery made, you can close out Firm

Commitment against Sales Rev and change
Sales Rev to amount orig anticipated when
Contract signed
64 Fair Value Hedge Firm Commitment E.g. - #1
E.g., Assume:
US Seller sells goods to foreign buyer
Denominated Currency FC
Price is 100,000 FC
Delivery & payment will be in 90 days
US Seller afraid that FC will drop & hedges
Exchange Rates:
At time of signing Contract:
Current spot rate: 1FC = 85
Forward rate: 1 FC = 84.5
At end of year:
Spot rate: 1 FC = 82
Forward rate: 1FC = 81.4
At settlement:
Spot rate: 1 FC = 80
There is no entry when the contract creating the Firm

Commitment is signed.
Just a memo
It is like signing an operating lease.
There is no entry when signing the Forward Contract.

Just a memo.
The US Co will lose a net $500 from the exchange loss

and the hedge gain.
.005 x 100,000 = $500
At the end of the year

We have to figure out what US Co made on Hedge
contract
Future rate changed from US$ .845 to US$ .814
Co locked in high sales price (future dollars)
Forward Contract (using future rates) has gained in future value
by $3,100.
(.845 - .814) x 100,000 = $3,100 gain
Future rates have to be converted to PV

$3,100 x .995025 (PVIF) = $3,085 gain
D.
Forward Contract
$3,085
$3,085
US Co. records a loss on the Firm Commitment equal to

the forward contract gain
There is no A/R here
Firm Commitment replaces reduction in A/R
D. Loss on Firm Commitment

C. Firm Commitment
$3,085
$3,085
At Settlement date.
How much did US Co make on Forward Contract?
Future rate changed from US$ .845 to US$ .80
(.845 - .80) x 100,000 = $4,500 total gain
This is todays dollars No need for PVs

This is total gain
US Co already reported $3,085 gain last year
Must subtract that off
Gain this year is $1,415
$4,500 - $3,085 = $1,415
D. Forward Contract
C.
Gain on Forward Contract
$1,415
$1,415
US Co. records a loss on the Firm Commitment equal to

the forward contract gain
D. Loss on Firm Commitment

C. Firm Commitment
$1,415
$1,415
Now, record underlying business transaction &

settle Forward Contract
Record receipt of FC from underlying business
transaction
Also, close out the Firm Commitment
This gives US Co revenue equal to what it
collected from customer plus gain from hedge.
D. Foreign Currency
$80,000
Firm Commitment
4,500
C.
Sales Revenue
$84,500
Assume COGS of $55,000

Not part of example Just included to give
fuller picture
D.
Cost of Goods Sold

C.
Inventory
$55,000
$55,000
Close out the forward contract:
D.
Cash
C.
$84,500
Foreign Currency
$80,000
Forward Contract
4,500
74 Cash Flow Hedge Heading
Types of Hedges
So far, we have discussed Fair Value

Hedges
Fair value hedges include hedges against
FC changes in binding contract situations:
A recognized asset (A/R)
A liability (A/P), or
A Firm Commitment
76 Cash Flow Hedge #1
You can also hedge your position in a nonbinding business arrangement (e.g.,
forecasted or planned transaction)
E.g., I have plans that involve FC
If I decide to do them, I dont want to be in a
worse position than I am now due to a change
in FC
This is called a Cash Flow Hedge
77
With a Cash Flow Hedge

There is no gain/loss on asset, liability or Firm
Commitment with an equal & offsetting hedge gain/loss
Instead, there is just a hedge gain/loss & cost of hedge
The hedge gain/loss is called Other Comprehensive
Income (OCI)
US Co saves OCI until it closes hedge
Then it closes OCI against account that needed protection of
hedge
E.g., US Co may want to buy foreign inventory

It enters into hedge and has gain (OCI)
When it closes hedge, US Co closes out OCI gain and makes
inventory less expensive (or COGS less)
78
Until US Co closes OCI

OCI sits in US Cos Equity Section
Like Unrealized Gain on Marketable
Securities Held For Investment
OCI doesnt hit the IS
Lets Review:
We dont have Exchange Gains/Losses with
equal and offsetting Hedge Gains/Losses
Terms of projected transaction are not fixed
Hedge will create Other Comprehensive Income
(OCI)
OCI not reported on IS

Reported in Equity Section of BS
Kept on Balance Sheet until hedge closes
Then OCI will offset cost of projected transaction
80
Hedging With Options

Cash Flow Hedges
US Co can also hedge with Option

Option is right (not obligation) to
buy (Call Option) or sell (Put Option)
specified amount of asset
at specified price
at specified future date
The price specified in the Option called

strike price or exercise price
82
Options are different than Forward Contracts

Forward Contracts will completely hedge a companys
position
Co doesnt have losses or gains
Options will only protect against losses

Co can receive gains on changes in FC rates
BUT
US Co doesnt pay to enter into Forward Contract
Options cost money up front
Cost of Option depends on how much protection US Co
wants
Cost may be too much for complete protection against loss
Option Prices have 2 parts:

Intrinsic Value of Option (OCI)
Excess of spot price over exercise price
If I close out my option right now, how much money
have I made
Once Option is in the money, change in spot rates =
change in Intrinsic value
Time-Value of Option
You pay more than Intrinsic Value of Option
Why? Because Option can make more $ in future
E.g., Assume:
US Co thinks it will buy inventory 3 months from now
US Co thinks that the inventory will cost 100,000 FC
US Co is afraid that FC will go up & inventory will cost
more 3 months from now
US Co buys option to buy 100,000 FC at 55 each
Now:
Current spot rate is 53
Option Price = $900
At end of year:
Spot rate is 57
Option Price = $2,400
Sell Option :
Spot rate is 57.5
Option Price = $2,600
When US Co buys Call Option:
D. Investment in Call Option

Cr. Cash
$900
$900
At purchase of Option:
Option has no intrinsic value
Option is not in the money
Spot rate is 53
Exercise Price is 55
$900 Price is all due to Time Value of Option

There is no intrinsic value yet, but it could be in the
future
At end of year:
Spot Rate goes up to US$ .57
Option now sells for $2,400
Total value of Option is $2,400

Need to divide Option Price into its 2 parts
Intrinsic Value of Option
Current Spot Price (US$ .57) Exercise Price (US$ .55) x
FC 100,000
$2,000
Remainder (Time Value of Option)

$400
$2,400 (Option Value) - $2,000 (Intrinsic Value) = $400
Option is already worth money & it could be worth more
Paying $400 for this potential
Note changes for 1st Year.

Intrinsic Value went from $0 to $2,000
Time Value of Option (Remainder) went from
$900 to $400
Intrinsic Value increased $2,000

Other Comprehensive Income
Time Value of Option went down $500

Loss on Option
Need to record increases

Loss on Call Option
Income Statement

OCI doesnt go into Income Statement
Sits in Owners Equity until you close Option
D.
Investment in Call Option

($2,400 - $900)
Loss on Call Option (Decrease in
Time Value of Option)
C.

(OCI) (Increase in Intrinsic Value
of Call Option)
$1,500
$500
$2000
Sell Option
Spot Rate goes up to US$ .575
Option now sells for $2,600
Total value of Option is $2,600

Need to divide it into two parts
Intrinsic Value of Option
Current Spot Price (US$ .575) - Exercise Price (US$ .55) x
100,000
$2,500
Remainder (Time Value)

$100
$2,600 - $2,500 = $100
We have to note changes for time period

involved
Since end of year:
Intrinsic Value went from $2,000 to $2,500
Time Value of Option (Remainder) went from $400 to
$100
Time Value of Option went down $300 (loss)

Intrinsic Value increased $500
Need to record increases

Time Value is Loss on Call Option
Income Statement

OCI doesnt go into Income Statement
Sits in Owners Equity until US Co closes Option
D.

($2,600 - $2,400)
Loss on Call Option (Decrease in
Time Value of Option)
C.

(OCI) (Increase in Intrinsic
Value of Call Option )
$200
300
$500
Settle the Call Option:

D.
Cash
C.
$2,600
$2,600
Close Other Comprehensive Income (OCI) to

Cost of Goods Sold
Purpose of Hedge was to insure lower inventory
cost
Results in lower COGS
D.

(OCI)
Cr. Inventory/ COGS
$2,500
$2,500

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Chapter 10

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1 Topic 10 - Heading

Chapter 10 Foreign Currency

2 Denominated Currency - Heading

2 Cos from 2 nations transact business

Denominated Currency is important

1st Rule: Whoever views denominated

E.g., assume payment will be in US$ &

French supplier takes US$s to bank &

French supplier takes US$s to bank and

E.g., assume Denominated Currency was

French supplier always receives s

8 Exchange Rate Quotations - Heading

Exchange Rate Quotations

9 Exchange Rate Quotations - #1

FC values can be given with a Direct

10 Exchange Rate Quotations - #1

FC values can be given with an Indirect

Most FC exchange rates are quoted this way

11 Exchange Rate Quotations - #2

E.g. of Both Types of Quotations:

Direct Exchange Rate

Indirect Exchange Rate

12 Foreign Currency Contracts - Heading

Current Contracts To Exchange Foreign Currency in Future

13 Exchange Rate Quotations - #3

Two types of exchange rates

14 Foreign Currency Contracts - #1

15 Foreign Currency Contracts - #2

E.g., US retailer buys wine from Fr

US retailer may want to avoid risk

16 Foreign Currency Contracts - #2

Enters Forward Contract

17 Calculating Forward Exchange Rates - Heading

Calculating Forward Exchange Rates

18 Calculating Forward Exchange Rates - #1

Forward rates are affected by a number of

19 Calculating Forward Exchange Rates - #2

Consider how interest difference affects

20 Calculating Forward Exchange Rates - #2

We are interested in exchange rates after one

Beg of year: FC 2 End of year: FC 2.20

21 Calculating Forward Exchange Rates - #3

Following formula gives forward rate

22 Two Transactions Treatment - Heading

Two Transactions Treatment

23 Two Transactions Treatment - #1

If contract with foreign Co & Denominated

24 Two Transactions Treatment - #1

Divide business transaction into 2

25 Two Transactions Treatment - #1

2nd transaction settlement of AR/AP

26 Two Transactions Treatment E.g. - #1

E.g., Assume US seller / Foreign buyer &

27 Two Transactions Treatment E.g. - #2

On Sale US Seller books:

On Payment of A/R US Seller books:

28 Two Transactions Treatment E.g. - #1

E.g., Assume US seller / Foreign buyer &

29 Two Transactions Treatment E.g. - #4

On Sale US Seller books:

On Payment of A/R US Seller books:

30 Two Rules - Summary

31 Foreign Currency Transaction Straddles 2 Years - Heading

Foreign Currency Transaction Straddles 2 Years