Chapter 6 - Foreign Currency Essay example
International Accounting, 7/e Frederick D.S. Choi Gary K. Meek
Chapter 6: Foreign Currency Ch 6 F i C Translation
Why do firms translate from one currency to another? What is the difference between a spot forward and swap spot, forward, transaction? What exchange rates are used in the currency translation process and what are their financial statement effects? How does a translation gain or loss differ from a transactions gain or loss? Is there more than one way of translating financial statements from one currency to another? If so, what are they? y , y How does the temporal method of currency translation differ from the current rate method? What is the relationship between …show more content…
Types of Transaction Rates
Forward transaction: agreements to g exchange a specified amount of one currency for another at a future date. Swap transaction: involves the simultaneous spot purchase and forward sale, or spot sale and forward purchase of a currency.
Foreign Exchange Forward Contracts
A forward contract requires the purchase (or sale) of currency units at a future date at the contracted exchange rate. g
This forward contract allows us to purchase 1,000,000 ¥ at a price of $.0080 US in 30 y days.
But if the spot rate is $.0069 US in 30 days, we still have to pay $.0080 US and we lose $1 100!! $1,100!!
Foreign Exchange Options Contracts
An options contract gives the holder the option of buying (or selling) the currency units at a future date at the contracted “strike” price. y p
An alternative is an option contract to purchase 1,000,000 ¥ at $.0080 US in 30 days. But it costs $.00002 per ¥.