Chapter 6 - Foreign Currency Essay example

1762 Words Oct 28th, 2013 8 Pages

International Accounting, 7/e Frederick D.S. Choi Gary K. Meek

Chapter 6: Foreign Currency Ch 6 F i C Translation

Learning Objectives
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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
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Forward Rate The exchange rate that can be locked in today for an expected future exchange transaction. The actual spot rate at the future date may differ from today’s forward rate.



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 ¥.

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