11/19 Chapter 11 Flashcards
hedging
where we offset variable rates of debt by hedging at a certain percentage
foreign currency transactions
of a US company denominated in other currencies must be restated to their US dollar equivalents before they can be recorded in our books
functional currency
primarily used currency, we have to translate foreign currency, currency rate fluctuate
determination of exchange rates
factors causing change level of inflation balance of payments - $ coming in vs out changes in a country's interest rate investment levels stability and process of governance
direct vs indirect
we won’t be tested on it, it is an inverse of another
direct
stated in dollars in numberator
US dollar/1FCU
direct is an american ter
Indirect
the inverse of direct
1FCU/US dollar
indirect is a european term
dollar is strengthened
variable rate is lower
dollar is weakened
variable rate increases
look at chart in book to see the indirect and direct exchange rates
look at it in ch 11 pg 549
spot rate
the exchange rate for immediate delivery of currencies
current rate
the spot rate on the entity’s balance sheet date, we need to use this rate for historical cost
sales spot rate
you would use the average spot rate to determine sales rates from foreign currencies
forward exchange rates
based on expectations of what will happen in the future
spread
the difference between the forward rate and the spot rate on a given date
Other Comprehensive Income
includes cash flow hedges
entry to record the exchange of currencies
rate 1.2
foreign currency units 6000
cash 6000
on july 2 the exchange rate changes to 1.1
foreign currency transaction loss 500
foreign currency units 500
hmmmm
transaction
obligation - we have to mark it to market
transaction date
record the purchase using the spot direct exchange rate on this date
balance sheet date
adjust the payable or receivable to its US dollar equivalent, end of period value uses current DER
pg 550
exchange rate chart pg 550
hedging account laws
133 defined derivatives
138 amended it
149 clarified issues
financial instrument
cash, evidence of ownership, or a contract that both
1 imposes on one entity a contractual obligation to deliver cash or another instrument
2. conveys to the second entity that contractual right to receive cash or another financial instrument
derivative
a financial instrument or other contract whose value is derived from some other item that has a variable value over time
derivative characteristics
require or permit net settlement
provide for the delivery of an asset that puts the recipient in an economic position not substantially different from net settlement
allow for the contract o be readily settled net by a market or other mechanism outside the contract
qualifications for a derivative to qualify as a hedging instrument
- sufficient documentation must be provided at the beginning of the hedge term to identify the objective and strategy of the hedge, the hedginn
Fair Value hedge
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measuring effectiveness
intrinsic value and time value