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9 Cards in this Set
- Front
- Back
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Current rate method |
FC ≠ PC 1) All assets/liabilities @ current rate 2) Common/Preferred Stocks, Dividends Pd @ historic rate 3) All revenue/expenses @ average rate 4) Exchange gains/losses are recognized in OCI within Shareholder's Equity under parent's Balance Sheet |
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Temporal Method |
FC=PC 1) Monetary a/l remeasured @ current rate 2) Non-monetary a/l (inventory, fixed & intangible assets) remeasured @ historic rate 3) Common/Preferred Stocks, Dividends Paid remeasured @ historic rate 4) COGS, Depreciation Expense, Amortization Expense @ historical rate All other revenues/expenses @ average rate 5) Exchange rate gains/losses recognized in parent's Income Statement |
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Value of Currency Forward |
Valuet = [Spott/(1+Rforeign)^ T/365] – [Forwardt/(1+Rdomestic)^T/365] |
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Currency Arbitrage |
Rule 1: Find out if arbitrage exists (1+rdomestic)-[((1+rforeign)xForwarddc/fc/Spotdc/fc]=0 -If it doesn't equal 0, Arbitrage exists -If sign is negative borrow domestic, if positive borrow foreign Rule 2: (rdomestic-rforeign) < (Forward - Spot)/Spot => borrow domestic (rdomestic-rforeign) > (Forward-Spot)/Spot => borrow foreign |
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Impact of changing rates on exposure |
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Mark to market valuation of a forward contract |
=[((FPt-FP)*Contract size)/(1+Rf^T)] |
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Triangular Arbitrage |
If Dealerask < Crossbid go counterclockwise (start at origin then go to numerator currency first) If Dealerbid > Crossask go clockwise (start at origin then to the denominator currency first) |
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Bid vs. Ask |
Bid= turning denominator into numerator (multiply denominator by bid price) Ask= turning numerator into denominator (divide numerator by ask price) |
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forward contract with continuous compounding |
=spot * e^[(Rdomestic-Rforeign)*T] |
