tailieunhanh - Lecture International accounting (4/e): Chapter 7 - Timothy Doupnik, Hector Perera

Chapter 7 - Foreign currency transactions and hedging foreign exchange risk. After you have mastered the material in this chapter, you will be able to: Provide an overview of the foreign exchange market, explain how fluctuations in exchange rates give rise to foreign exchange risk, demonstrate the accounting for foreign currency transactions,. | Chapter 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk Learning Objectives Provide an overview of the foreign exchange market Explain how fluctuations in exchange rates give rise to foreign exchange risk Demonstrate the accounting for foreign currency transactions Describe how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange risk Describe the concepts of cash flow hedges, fair value hedges, and hedge accounting 7-2 2 Learning Objectives Demonstrate the accounting for forward contracts and options used as cash flow hedges and fair value hedges to hedge foreign currency assets and liabilities, foreign currency firm commitments, and forecasted foreign currency transactions. 7-3 Foreign Exchange Markets Foreign exchange rate Purchase price of a foreign currency 1945 –1973 Exchange rates fixed in . dollar . dollar was fixed in gold . dollar was fixed to gold at $35 per ounce 1960s Balance-of-payments deficits in the . March 1973 most currencies float in value 7-4 4 Foreign Exchange Markets Exchange Rate Mechanisms Independent float Currency value allowed to move freely Little government intervention Pegged to another currency Currency value fixed in terms of a foreign currency . . dollar Central bank maintains the exchange rate European Monetary System (Euro) Twelve countries use a single currency, Floats against other currencies . . dollar 7-5 5 Foreign Exchange Markets Foreign Exchange Rates Interbank rates Wholesale prices Banks charge one another Exchange of currencies Published on the internet and in newspapers Reflected Direct quotes (US $ equivalent) Indirect quotes (currency per US $) Direct quote reciprocal of indirect quote Indirect quote reciprocal of direct quote 7-6 6 Foreign Exchange Markets Spot rates Today’s price for purchasing or selling a foreign currency Forward rate Today’s price for purchasing or selling a foreign currency For some future date Premium | Chapter 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk Learning Objectives Provide an overview of the foreign exchange market Explain how fluctuations in exchange rates give rise to foreign exchange risk Demonstrate the accounting for foreign currency transactions Describe how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange risk Describe the concepts of cash flow hedges, fair value hedges, and hedge accounting 7-2 2 Learning Objectives Demonstrate the accounting for forward contracts and options used as cash flow hedges and fair value hedges to hedge foreign currency assets and liabilities, foreign currency firm commitments, and forecasted foreign currency transactions. 7-3 Foreign Exchange Markets Foreign exchange rate Purchase price of a foreign currency 1945 –1973 Exchange rates fixed in . dollar . dollar was fixed in gold . dollar was fixed to gold at $35 per ounce 1960s Balance-of-payments .