Foreign Currency Denominated Transactions pg 242

Question 1

Foreign Currency TRANSACTIONS

Answer 1

Transactions of domestic entity denominated in foreign currency but needs to be recorded on domestic entity’s books in domestic currency

Question 2

Foreign Currency TRANSLATION

Answer 2

FS denominated in foreign currency but to be reported in FS expressed in domestic currency

Question 3

Direct Quote

Indirect Quote

Answer 3

• Direct Exchange Rate: measures how much domestic currency must be exchanged to receive one unit of foreign currency
• Indirect Exchange Rate: measures how many units of foreign currency may be purchased w/ one unit of domestic currency

Question 4

Spot Rate

Forward Rate

Answer 4

• Spot Rate #: units of currency would be exchanged for one unit of another currency @ given date
• Future Rate: # units of one currency would be exchanged for units of another currency @ specified future pt in time

Question 5

Forward Contracts
Foreign Currency Forward Exchange Contracts
Foreign Currency Option Contracts

Answer 5

1. FC: Agreements to buy/sell(or option to buy/sell) specified commodity in future @ price determined @ time FC is executed
2. FXFC: Agreement to buy/sell specified amt of foreign currency @ specified future date @ specified forward rate-derivative instrument so adj and reported @ FV
3. FCO: Agreement give right to buy (call) or sell (put) specified amt of foreign currency @ specified forward rate during or @ end of specified time period–derivative instrument so adj and reported @ FV

Question 6

Pro/Con Foreign Currency Option Contracts

Answer 6

• CON: FCO more costly b/c option must be purchased by paying option premium to counter-party for right to buy/sell currency
• PRO: Benefit of FCO if changes in exchange rate do not warrant it, contract doesn’t have to be exercised, so only option premium (cost) is incurred

Question 7

Foreign Currency Forward Exchange Contracts

Answer 7

-Exchange Currencies (settle contract) @ maturity
- FV determined by CHANGES in forward exchange rate during life of contract discounted to its present value
>Can result in gain or loss
-At inception of contract typically NO value, value arrives when CHANGES in forward contract happen

Question 8

Purpose of Hedging Foreign Currency Transactions::

Details of Purpose criteria & Accting treatment described more on pg 264-269–chart pg271

Answer 8

1. Forecasted Transactions
2. Unrecognized, Firm Commitment
3. Recognized Asset/Liability
4. AFS Investment
5. Net Investment in Foreign Operation