6.02- Foreign Currency Exchange Transactions Flashcards
1
Q
What are FORWARD EXCHANGE CONTRACTS?
A
An exchange of one currency for another at a specific rate at a specific time.
2
Q
Why would a company enter into a FORWARD EXCHANGE CONTRACT while HEDGING? What type of risk is eliminated?
A
- To protect themselves from fluctuations in the exchange rate.
- Eliminates Market Risk
3
Q
What is it called when a company takes advantage of a potential FORWARD EXCHANGE CONTRACT?
A
Speculation
4
Q
Explain SPECULATION
A
A company buys a currency now that will be worth more later, or sells a currency now that will be worth less later.
5
Q
What is SPECULATION an example of? What are they reported at? Where are unrealized gains or losses reported?
A
- Derivatives
- Reported at Fair Value
- Gains or losses in income statement
6
Q
What is the SPOT RATE?
A
The exchange rate today
7
Q
What is the FORWARD RATE?
A
A projection of the exchange rate in the future
