Introduction and Definitions

Question 1

Types of questions

Answer 1

• Impact of the changes in exchange rates on the US Dollar
• Balance sheet accounts that are dominated in foreign currency
• Impact on net income (gains and losses)

Question 2

What is an FX transaction?

Answer 2

Settled in a foreign currency but reported on the financial statements in USD

Question 3

Define Exchange Rate:

Answer 3

The price of one unit of currency expressed in units of another currency

Direct exchange rate: Domestic price of one unit of a foreign currency: $1.24 = $1 Euro

Indirect Exchange Rate: $1 Euro= .854 USD

Question 4

What is the spot rate:

Answer 4

Exchange rate today

Question 5

Forward rate:

Answer 5

Rate in the future

Question 6

How do you account for foreign exchange:

Answer 6

Transactions are measured and reported in USD

Foreign currency units are converted to USD using the SPOT RATE at the date of transaction

Effects of the changes in rate are recognized in income

Question 7

What are the dates where the financial statements are impacted by foreign currency?

Answer 7

1) Initiation date
2) Financial statement date
3) Settlement date

Question 8

When the direct exchange rate decrease relative to the Euro, do you have a strengthening of the USD or weakening?

Answer 8

Strengthening

Question 9

When the indirect exchange rate decreases relative to the Euro, do you have a strengthening or weakening of the USD?

Answer 9

Weakening

Question 10

Types of questions on Import Transactions?

Answer 10

What is reported for the FX reported payable?

What is the gain or loss recognized on the income statement?

Question 11

What is an import transaction?

Answer 11

Buy something on account settled in foreign currency

Question 12

When you import inventory or goods dominated in foreign currency, what amount should be reported and does it change?

Answer 12

The amount reported is at the transaction date and it does not change!!

Question 13

In an export transaction, what amount do you report the sale (revenue) at and how does this amount change over time?

Answer 13

1) Record at the date the revenue can be recognized in USD.

2) This amount does not change

Question 14

What are the two types of contracts that can be used to mitigate FX risk?

Answer 14

1) Futures Contract- OBLIGATION to buy or sell foreign currency
2) Options contract- Right to buy FC, not an obligation

Question 15

When evaluating the changes in a contract’s rate, which rate is used (i.e. the spot rate or forward rate)

Answer 15

For contracts, you always use the forward rate

Question 16

If the forward rate decreases in value from over time, does this result in a gain or loss?

Answer 16

You would have a GAIN if it decreases in value

Foward Contract XX
Gain on forward contract (XX)

Question 17

In a forward contract, what is the journal entry at the date of initiation?

Answer 17

No entry is required on this date

Question 18

In a option contract, what is the journal entry made at the date of initiation?

Answer 18

Book the option premium.

Foreign currency Option XX
Cash (XX)

Question 19

If the option premium increases over time, how do you book that journal entry?

Answer 19

Foreign Currency option XX
Foreign Currency Option Gain (XX)

*take the difference between the two values

Question 20

How do you measure hedge instruments for foreign currency?

Answer 20

You measure at fair value

Question 21

What are the two types of hedges?

Answer 21

• Natural (Economic) hedge

Qualified hedge

Question 22

Under an economic hedge, where do the gains and losses get reported?

Answer 22

Net income

Question 23

Under an qualified hedge, where do gains and losses go when fair value changes?

Answer 23

• Cash Flow Hedge (OCI)

- Fair Value Hedge (Net Income)