Ch 6 Flashcards
What are direct rates
US dollar price for one unit of foreign currency
What are indirect rates
reverse of direct rate
What is a spot rate
what currency can be purchased or sold today
What is a forward rate
price the currency can be bought or sold in the future
What is a option contract
gives holder the right but not obligation to trade currency in the future
What is fx g/(l)
difference in change in value of currency over time
Explain 2 transaction perspective
treats sale and subsequent collection of cash as two seperate transactions
- book sale
- at payment date book fx gain loss
- book cash received
How do you mitigate risk of foreign exchange
using a hedge
explain forward contract
no charge to enter the contract. charge is at the end
Non cancellable order
cannot change price once agreed to
When is a hedge a hedge
when its highly effective
What is the rule about losses in forward contract?
recognized only to the extent it effects the gain
What is AOCI
accumulates unrealized gains and losses. things that are not ready to go into the income stmt but still need to be presented.
What are the 2nd and 3rd accounts for CF hedge
- gain and AOCI
3. Forward and AOCI
What is the natural balance of AOCI?
credit
What increases AOCI?
gains
What are the 2nd and 3rd entries for a FV hedge?
- AR/AP and G/L
3. L/G on forward and forward
