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50 Cards in this Set
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- Back
- 3rd side (hint)
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Direct Quote
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the number of U.S. dollars to purchase one foreign currency unit (ex. $1.23 = 1 euro)
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Indirect Quote
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The number of foreign currency units to purchase one U.S. dollar (ex. 0.813 euros = $1 U.S.)
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U.S. dollar equivalent
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# foreign currency units / indirect quote = U.S. dollar equivalent
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Spot Rate
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Today's price to buy foreign currency TODAY.
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Forward Rate
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Today's price to buy foreign currency at some specified future date under a FOREIGN CURRENCY FORWARD CONTRACT
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Exercise Price
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the price to buy foreign currency at some specified future date under a FOREIGN CURRENCY OPTION.
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also known as The strike price
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Strike Price
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The price to buy foreign currency at some specified future date under a FOREIGN CURRENCY OPTION. the difference between a foreign currency option and a foreign currency forward contract is with the option, you have the option of whether or not to execute. When you sign a foreign currency forward contract you WILL buy (or sell) the foreign currency at the designated price.
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also known as the Exercise price.
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Two-transaction perspective
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treat the sale (or purchase) and subsequent collection (or payment) of cash as two separate transactions.
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How are Foreign exchange gains or losses reported?
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As a part of net income.
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Exposed Foreign Currency Transactions
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The transaction is exposed to foreign exchange losses. A purchase made on account represents a liability exposure and a sale made on account represents an asset exposure.
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Foreign Currency Forward Contracts
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here the U.S. firm either contracts to buy or contracts to sell foreign currency at a specified rate (forward rate) at some specified future date. A forward contract "locks in" the exchange rate that will be used for exchanging currencies at that future date. The parties to the contract must exchange currencies at that future date, whether it results in a foreign exchange gain or loss. The is NO FEE to engage in a forward contract.
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A forward contract to sell foreign currency hedges which type of exposure?
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Asset.
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A forward contract to buy foreign currency hedges which of of exposure?
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Liability.
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A Premium
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The difference between the forward rate and the spot rate when the forward rate > spot rate.
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A Discount
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The difference between the forward rate and the spot rate when the forward rate < spot rate.
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Foreign Currency Option
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here the U.S. firm either purchases the right to buy (CALL option) or purchases the right to sell (PUT option) foreign currency at a specified rate (strike price/exercise price) at some specified future date. THE OPTION WILL ONLY BE EXERCISED IF IT IS "IN THE MONEY" (the option generates a foreign exchange gain at the exercise date).
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A sell/put foreign currency option hedges which type of exposure?
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Asset.
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A buy/call foreign currency option hedges which type of exposure?
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Liability.
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A BUY (call) option is "in the money" if...
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spot rate > strike price on a given date
(less U.S. $ to buy foreign currency at option price than spot rate-- buy low, sell high) |
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A SELL (put) option is "in the money" if...
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strike price > spot rate on a given date.
(more U.S. $ gained when selling foreign currency at option strike price than spot rate--buy low, sell high) |
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Option premium
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The initial fee to purchase an option. The premium also represents the option's FMV, which will change over the option's life.
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What are the two components of the premium?
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Intrinsic value and Time value
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Intrinsic Value (in regard to option premiums)
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what the option's value would be if the option were about to expire (0 if "at the money" or "out of the money"; if "in the money," equals difference between spot and strike on a given date).
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Time Value (in regard to option premiums)
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Premium in excess of the intrinsic value. Even if an option is not "in the money," it has value since there is the potential that the spot rate will change so that the option will become "in the money" before expiration. Changes in the time value are expensed as Option Expense.
Time value = total premium when the option is not "in the money" Time value = 0 at option expiration date. |
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Cash Flow Hedges
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the variability of the hedged item's cash flows is offset by the cash flows of the hedged instrument. Examples include risks associated with interest payments on a variable-rate bond or a forecasted transaction, recognized foreign currency assets (A/R) and liabilities (A/pay), ex.
Gains/Losses on hedge instrument and hedge instrument fair value (and changes) are included in Accumulated Other Comprehensive Income (AOCI), which is reported in stockholders' equity. Discount/premium expense/ revenue or option expense associated with the hedges instrument are included in net income. |
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Fair Value hedges
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protect against a change in fair value of a recognized asset or liability -OR- of an unrecognized firm commitment.
For Fair Value hedges: FX gains/losses on A/R or A/pay and losses/gains on hedge instrument are reported in the Income Statement. |
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Historical exchange rate
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exchange rate when the transaction occurred.
(note: Historical rate = date of acquisition of foreign operations, if later [than date transaction occurred].) |
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Current exchange rate
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exchange rate at the Balance Sheet Date
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Average exchange rate
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average of the exchange rates over the period
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Functional Currency
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The primary currency of the foreign entity's environment (U.S. dollar or foreign currency).
SFAS 52 lists six indicators that are used to determine an entity's functional currency... |
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The six indicators that are used to determine an entity's functional currency are:
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1. Cash Flows
2. Sales Price 3. Sales market 4. Expenses 5. Financing 6. Intercompany Transactions |
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When is the Current Rate Method used?
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used when the functional currency is foreign currency.
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When is the Temporal Method used?
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used when the functional currency is the U.S. dollar --OR-- when the foreign entity is located in a highly inflationary economy (cumulative three-year inflation > 100%).
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Functional Currency is Foreign currency if Cash flows...
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Are primarily in foreign currency; does not affect Parent's cash flow
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Functional Currency is U.S. currency if Cash flows...
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Directly affects Parent's cash flows
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Functional Currency is Foreign Currency if Sales Price...
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Is not affected on short-term basis by exchange rate changes.
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Functional currency is U.S. currency if Sales price...
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IS affected on a short-term basis by exchange rate changes.
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Functional currency is Foreign currency if Sales market...
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Active local market
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Functional currency is U.S. currency if Sales market...
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is mostly in Parent's country
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Functional currency is Foreign currency if Expenses...
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are primarily local.
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Functional currency is U.S. currency if Expenses
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are primarily from components obtained from Parent
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The functional currency is Foreign Currency if the Financing...
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Is primarily done in foreign currency; foreign currency cash flows adequate to service obligations
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the functional currency is U.S. Currency if the Financing...
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Is primarily in U.S. dollars; foreign currency cash flows not adequate to service obligations
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the functional currency is foreign currency if the Intercompany transactions...
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are low volume; not extensive interrelation with Parent
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The functional currency is U.S. currency if intercompany transactions
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are high volume; extensive interrelation with Parent.
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If using the current rate method, when is there a net asset exposure?
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When assets > Liabilities
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If using the current rate method, when is there a net liability exposure?
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When Liabilities > Assets
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If using the current rate method, when is there a zero translation adjustment?
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When Assets = Liabilities
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If using the current rate method, how are the Capital Stock, APIC, and Dividends Accounts translated?
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At the Historical Exchange rate. (These accounts are not exposed to translation adjustment).
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True or false?
When using the current rate method, Retained earnings is translated at a composite rate. |
True.
Beg R/E + Net Income - Divs = Ending R/E |
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