Premium Essay

Foreign Exchange

In: Business and Management

Submitted By deepakrocks
Words 1995
Pages 8
Measuring/Managing Translation and Transaction Exposure

Chapter 10 Lecture Notes

Measuring Translation and Transaction Exposure


I. ALTERNATIVE MEASURES A. TYPES 1. Accounting Exposure: arises when reporting and consolidating financial statements require conversion from subsidiary to parent currency.

2. Economic Exposure: arises because exchange rate changes alter the value of future revenues and costs.

Accounting Exposure

B. Accounting Exposure = Transaction risk + Translation risk


C. Economic Exposure = Transaction Exposure +Operating Exposure

Operating Exposure arises because exchange rate changes alter the value of future revenues and costs.


I. FOUR METHODS OF TRANSLATION A. Current/Noncurrent Method 1. Current accounts use current exchange rate for conversion. 2. Income statement accounts use average exchange rate for the period.

B. Monetary/Nonmonetary Method 1. Monetary accounts use current rate 2. Pertains to - Cash - Accounts receivable - Accounts payable - Long term debt 3. Nonmonetary accounts - Use historical rates - Pertains to: Inventory, Fixed assets, Long term investments 4. Income statement accounts - Use average exchange rate for the period.

C. Temporal Method 1. Similar to monetary/non-monetary method. 2. Use current method for inventory.

D. Current Rate Method all statements use current exchange rate for conversions.

I. FASB NO. 52 A. Dissatisfaction with FASB No. 8: “true” profitability often disguised by exchange rate volatility.

B. Translation Gains or...

Similar Documents

Premium Essay

Foreign Exchange

...OVERVIEW OF FOREIGN EXCHANGE OPERATION (IMPORT PROCEDURE) OF FIRST SECURITY ISLAMI BANK LTD. & A COMPARATIVE ANALYSIS WITH OTHER BANKS by Taslima Akter ID# 0931048 An Internship Report Presented in Partial Fulfillment of the Requirements for the Degree Bachelor of Business Administration INDEPENDENT UNIVERSITY, BANGLADESH May, 2013 Comparative study of Foreign Exchange Operations of FSIBL 1 AN OVERVIEW OF FOREIGN EXCHANGE OPERATION (IMPORT PROCEDURE) OF FIRST SECURITY ISLAMI BANK LTD. & A COMPARATIVE ANALYSIS WITH OTHER BANKS by Taslima Akter ID# 0931048 has been approved 9th May 2013 ______________________________ Abul Khair Jyote Lecturer, Marketing School of Business Independent University, Bangladesh Comparative study of Foreign Exchange Operations of FSIBL 2 Table of Contents Particulars Page No. Letter of Transmittal 01 Acknowledgement Executive Summary 02 04 Chapter-01 Introduction Overview of First Security Islami Bank Ltd Vision 06 07 08 Mission Strategies Financial Highlights Corporate Information 08 09 10 11 Board of Directors Products And Services Organizational Structure My job Responsibilities Branch Network 12 13 14 15 15 Findings Recommendations 15 16 Chapter-02 Introduction Background of the Report Scope of the Study: Objective of the Study Benefit of the report Limitations of the Study 17 17 18 18 19 19 Chapter-03 Literature Review 21 Chapter-04 Methodology 23 Chapter-5 Foreign Exchange (Import Procedure) Foreign......

Words: 10959 - Pages: 44

Premium Essay

Foreign Exchange

...Foreign Exchange Sherie Dover, Jason Godwin, Jonathan Haus, John Strange, and Edgardo Zavala University of Phoenix ECO 360, Economics for Business I Harley Sommers July 17, 2007 Foreign Exchange Introduction Recent Dollar Trend The United States dollar began to fall in world currency markets in 2006. Many economists predict that the United States dollar will decline at an even greater rate in 2007. Economists believe that the United States dollar could lose as much as 30% of its value. The debate that a recession may be around the corner is backed by international trade and Federal budget deficits that are anything but under control (Dissidentnews/Worldpress, 2007). The United States dollar began at 88.86 on the FOREX international currency index in January of 2006. 83.67 is where the United States dollar ended at the end of 2006, a drop of about 6%. In 2006, the United States dollar fell 11.5% versus the euro, 13.6% compared to the British pound, and by 7.3% versus the Swiss franc. Central bankers are expected to move away form the United States dollar with regards to their foreign reserve holdings (Dissidentnews/Worldpress, 2007). China the second largest holder of United States debt reduced its purchases of United States bonds by 1.7% in the first 10 months of 2006. Venezuelan, Indonesian, and the UAE said they will invest lees of their reserves in dollar assets. Iran’s switch to Euros may be the greatest threat to the United States dollar. The use of the......

Words: 773 - Pages: 4

Premium Essay

Foreign Exchange Derivative

...J. of Multi. Fin. Manag. 13 (2003) 123 Á/139 Foreign-denominated debt and foreign currency derivatives: complements or substitutes in hedging foreign currency risk? William B. Elliott a,*, Stephen P. Huffman b, Stephen D. Makar b a Department of Finance, Oklahoma State University, 224 Business, Stillwater, OK 74078, USA b University of Wisconsin Oshkosh, Oshkosh, WI, USA Received 30 June 2001; accepted 20 April 2002 Abstract Using a unique dataset, this study examines the relationship between foreign-denominated debt (FDD), foreign currency exposure and foreign currency derivative (FCD) use, for a sample of US multinational corporations. We find a positive relationship between the exposure to foreign currency risk and the level of FDD, indicating that this debt may be used as a hedge. Moreover, FDD is negatively related to the use of FCD. We interpret this as further evidence that FDD is used as a hedge, and substitutes for the use of FCD in reducing currency risk. # 2002 Elsevier Science B.V. All rights reserved. Keywords: F23 Keywords: Hedging; Foreign debt; Currency derivatives 1. Introduction US multinational corporations (MNCs) employ a variety of financial and nonfinancial techniques to reduce or hedge their exposure to changing exchange rates (e.g. Bodnar et al., 1998; Marshall, 2000). Financial techniques include foreign- * Corresponding author. Tel.: '/1-405-744-8639; fax: '/1-405-744-5180 E-mail address:......

Words: 8178 - Pages: 33

Premium Essay

Foreign Exchange

...Foreign Exchange The foreign exchange market facilitates the exchange of one currency for another. It is make up of banks, commercial companies, investment management firms, forex brokers, and investors. It is considered to be the largest financial market in the world. This paper will discuss everything from how the foreign exchange market began to the current market. History of Foreign Exchange The foreign exchange market has evolved over the years. From 1876 to 1913, the gold standard was used; meaning countries used gold to back its currency. Each currency was able to be converted to gold at a specified rate. This means that the exchange rate between currencies was determined by how much gold each was worth. The gold standard was suspended in 1914, when World War I began. Some countries temporarily reverted to the gold standard after the war, but abandoned it when the financial crisis of the 1920s hit. Throughout the 1930s the foreign exchange market was considered very unstable, and during this time the volume of foreign trade declined significantly. The next step in the history of foreign exchange would be to agree on fixed exchange rates. This was declared in the Bretton Woods Agreement. The agreement called for governments to set exchange rates between currencies. They were also required to prevent exchange rates from deviating more than 1 percent from the original established rate. This agreement lasted from 1944 to 1971. In 1971, the Smithsonian Agreement......

Words: 727 - Pages: 3

Premium Essay

Foreign Exchange

...BRAC University Journal, vol. V, no. 2, 2008, pp. 81-91 FOREIGN EXCHANGE RISK MANAGEMENT PRACTICES - A STUDY IN INDIAN SCENARIO Sathya Swaroop Debasish Department of Business Management Fakir Mohan University Vyasa Vihar, Balasore - 756019 Orissa, INDIA ABSTRACT Indian economy in the post-liberalisation era has witnessed increasing awareness of the need for introduction of various risk management products to enable hedging against market risk in a cost effective way. This industry-wide, cross-sectional study concentrates on recent foreign exchange risk management practices and derivatives product usage by large non-banking Indian-based firms. The study is exploratory in nature and aims at an understanding the risk appetite and FERM (Foreign Exchange Risk Management) practices of Indian corporate enterprises. This study focusses on the activity of end-users of financial derivatives and is confined to 501 non-banking corporate enterprises. A combination of simple random and judgement sampling was used for selecting the corporate enterprises and the major statistical tools used were Correlation and Factor analysis. The study finds wide usage of derivative products for risk management and the prime reason of hedging is reduction in volatility of cash flows. VAR (Value-at-Risk) technique was found to be the preferred method of risk evaluation by maximum number of Indian corporate. Further, in terms of the external techniques for risk hedging, the......

Words: 5520 - Pages: 23

Premium Essay

Foreign Exchange Derivatives

...Foreign Exchange Derivatives Definition Any financial instrument that locks in a future foreign exchange rate. These can be used by currency or forex traders, as well as large multinational corporations. The latter often uses these products when they expect to receive large amounts of money in the future but want to hedge their exposureto currency exchange risk. Financial instruments that fall into this category include: currency options contracts, currency swaps, forward contracts and futures contracts. Types There are three types of foreign exchange derivatives used for hedging as follows: I. Forward Hedging II. Money Market Hedging III. Option Hedging Forward Hedging It refers to the Contract to buy or sell an asset at a given price on a specific date in the future. Investors use this device to avoid major losses if the price of the asset changes dramatically before it is exchanged. Money Market Hedging It refers to the Borrowing and lending in multiple currencies, for example to eliminate currency risk by locking in the value of a foreign currency transaction in one's own country's currency. Option Hedging It refers to the right to buy or sell foreign exchange at a specified strike price in exchange of a certain option premium either at the option expiration date or during the option period. * If one acquires the right to purchase foreign exchange, it is called the call option. Buyer of the call option pays option premium & it will be...

Words: 1572 - Pages: 7

Premium Essay

Foreign Exchange operation in INRUSD, INRGBP, INREUR and INRJPY. However in terms of the open interest currency derivatives trade in MCX is more as compared to the NSE. By consider both stock and commodity exchanges for launching currency futures contracts government of India has done a commendable job which is expected to increase the number of quality players, introduce healthy competition and boost trading volumes of Indian currency futures. The global markets (mainly USA) become active only after Indian markets close at 5.00 pm and as a result there is an evident fear about the risks associated with overnight fluctuations in the currency pair. Therefore the functioning as well as the profitability in Indian currency futures is effected by the current performance of the international currency futures market. It is imperative that any evaluation, projection on Indian currency futures market should be undertaken keeping the international market in perspective. KEYWORDS: Currency Futures, Open Interest, Contract Traded, Turnover ___________________________________________________________________________ INTRODUCTION Currency Futures is an agreement or contract, which involves buying or selling one currency for another (foreign exchange), on a specified future date, at an indicated price. Although foreign...

Words: 2651 - Pages: 11

Premium Essay

Significance of Foreign Exchange

...accumulation * History of Foreign Exchange Reserves * Adequacy and Excess reserves * List of countries by Foreign Exchange Reserves * New Realities of Forex Reserves and Management * Conclusion * Reference SIGNIFICANCE OF FOREIGN EXCHANGE RESERVES Introduction Foreign-exchange reserves (also called forex reserves or FX reserves) are assets held by central banks and monetary authorities, usually in different reserve currencies, mostly the United States dollar, and to a lesser extent the euro, the United Kingdom pound sterling, and the Japanese yen, and used to back its liabilities, e.g., the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions. Deposits of a foreign currency held by a central bank. Holding the currencies of other countries as assets allow governments to keep their currencies stable and reduce the effect of economic shocks. The use of foreign exchange reserves became popular after the decline of the gold standard. Definition In a strict sense, foreign-exchange reserves should only include foreign currency deposits and bonds. However, the term in popular usage commonly also adds gold reserves, special drawing rights (SDRs), and International Monetary Fund (IMF) reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. Foreign Exchange reserves......

Words: 7085 - Pages: 29

Premium Essay

Foreign Exchange Market of Korea

...The Foreign Exchange Market of South Korea Brief Introduction of currency Won The currency used in South Korea is the Won, (sign: ₩; code: KRW), it can be further divided in 100 jeons, the subunit. Won has been existed for thousands of years in South Korean History. After the world war two, the Korea continent was divided into North Korea and South Korea. Both of the two countries have been using won as their currencies. The foreign exchange policy of won followed a pegging method to dollars before 1980. From 1980 to 1997 South Korea had initiated a series of actions towards floating exchange rate. During the East Asian financial crisis, the won was devalued at almost half of its original value. The monetary system The monetary system is basically consisting of four major government entities; “the Ministry of Finance and Economy (MOFE), the Bank of Korea (BOK), the Financial Supervisory Service (FSS), and the Korea Customs Service (KSS)” (Korea, South-Money). The bank of Korea, according to Savada and Shaw in their country paper on South Korea, is established as the central bank of South Korea and supervised all the financial transactions of diversified financial institutions. Its major functions also includes the issuance of currency, the determination on the monetary and credit policies, the collection and record of the statistics of overall economy, and the regulation of all private banks. It also closely partners with the central government for raising funds for......

Words: 2048 - Pages: 9

Premium Essay

Foreign Exchange Rate Regime Studi Politici e Internazionali ‘International Economic and Trade Relations’ LM–62 MASTER THESIS in DEVELPOMENT ECONOMICS Foreign Exchange regimes and major currencies Supervisor Student Prof. Paolo Sospiro Parapatakam Praveen Reddy MAT: 62282 ACADEMIC YEAR 2013/2014 Contents Introduction 5 Chapter 1 7 1. History of exchange rate regimes: 7 1.1 Gold Standard System (1880-1914): 7 1.2 Interim instability (1914-1944): 7 1.3 Bretton woods system (1946-1971). 8 Figure1.World Trade (1929-33).............................................................................................9 1.4 Par Value system: 9 2. Classification of Exchange Rate Regimes: 10 2.1 De facto Classification (1998-2009) 11 Diagram1. De Facto Classification of Foreign Exchange Regimes (Nov 1998 – Jan 2009).......12 2.2 Revised De Facto Classification System (2009 January to Present): 15 Table1. Shares of Classifications Using the 1998 and 2009 Systems. 16 2.3 Revised Classification System Definitions: 17 Hard pegs: 17 Soft pegs: 18 Floating arrangements: 19 Residual: 20 2.4 De facto Classification of Exchange Rate Arrangements and Monetary Policy Frameworks-2014 20 Table2. Monetary Policy Frame work......

Words: 16529 - Pages: 67

Premium Essay

Foreign Exchange Markets

...Foreign Exchange Markets and Transactions 1) Foreign Exchange Market In 1971 the US suspended the convertibility of the dollar to gold, and by 1973 the US and other nations had accepted floating exchange rates. Today the exchange market is the largest market in the world. The market is an elaborate network of trading desks, banks, cooperations and individuals who buy and sell currencies all over the world. 2) What is an Exchange Rate? An Exchange rate is the price of a currency. The rates are available from many print and electronic sources. Direct quotes = Exchange rates that are listed in the form of “US $ Equivalent” Indirect quotes = Rates listed in the form of “Currency per US” 2.1 ) Cross Exchange rates Most quotations in exchange rates tables are expressed in terms of the US dollar. But some occasions require exchange rates expressed in term of two non-US dollar currencies. These rates are called cross exchange rates. 2.2) Bid/Ask Spread When banks or brokers facilitate currency transactions they charge a fee for their service. In many cases these fees come from the difference between the bank´s bid and ask quotes -> called the bit/ask spread. 3) Exchange Rate Movements Prices and currencies can fluctuate. 3.1) Currency Appreciation and Depreciation Appreciate= a currency in value relative to other currencies. Depreciate= a currency decreases in value A purchasing power of one currency relative......

Words: 978 - Pages: 4

Free Essay

Foreign Exchange Markets

...Volatile Exchange In the Global Market Discuss and explain the functions of the foreign exchange market. The role of the foreign exchange market in international business and how it impacts a country's ability to do business is simple: It keeps the money flowing around the world. The foreign exchange (FOREX) market provides a place for nations to purchase, borrow, or sell their own currency to members of other nations. What the FOREX do in this regard is provide the resources for countries to make payments and transfer funds across borders, and provides purchasing power from one currency to another. These provisions make valuations of currency available to determine one of the greatest functions of the FOREX, the exchange rate. (Hill, 2011) The exchange rate is a price determined by the number of units of one nation's currency that must be surrendered in order to acquire one unit of another nation's currency. The exchange rate between two currencies is dependent upon official or private participants to buy and sell its currency to maintain an authorized pegged rate. The exchange rates in FOREX are set then by the market and not by governments. Even with these determinations, the biggest player in defining the exchange rates rely on supply and demand of American goods and currency. International business relies directly on the functionality of the FOREX. In addition to international business, citizens traveling to foreign nations have to rely on a standard in......

Words: 1393 - Pages: 6

Premium Essay

Assignment Foreign Exchange

...When we buy foreign goods or invest in another country we have to obtain some of that country’s currency to make the transaction. When foreigners buy US produced goods or invest in the United States they have to obtain required US dollars. We get foreign currency and foreigner get US dollars in the foreign exchange market. The foreign exchange market is the market in which the currency of one country is exchanged for the currency of another. The market is made up of thousands of people mainly importers and exporters, banks and specialists in the buying and selling of foreign exchange brokers. The price of one currency in terms of another is called the exchange rate. Exchange rates are almost identical no matter where ever in the world the transaction is taking place. Foreign exchange conversion has daily rate on the basis of internationally acceptable hard currency like US dollar, British Pound Sterling, Euro etc. Foreign Exchange Regimes Foreign exchange rates are of critical importance for millions of people. For its importance governments pay a great deal of attention to what is happening in foreign exchange markets and more than that, take actions designed to achieve what they regard as desirable movements in exchange rates. There are three ways in which the government can operate the foreign exchange market. They are. * Fixed exchange rate. * Flexible exchange rate. * Managed exchange rate. A fixed exchange rate is an exchange rate the value of......

Words: 1180 - Pages: 5

Premium Essay

Foreign Exchange Market

...Foreign Exchange Market Demond McKeever National University In view of the fact that the international business environment is not set up with a worldwide medium for exchange, the foreign exchange market is a necessity for international trade. The major functions of the foreign exchange market are to transfer purchasing power, allocate open trade for international markets, monitor exchange rates from fluctuating to rigorously, and to aid in the import and export of goods between countries by providing credit for financing international trade (Suranovic, 2005) The foreign exchange market or forex market as it is often called is the market in which currencies are traded. Currency Trading is the world’s largest market consisting of almost trillion in daily volume and as investors learn more and become more interested, the market continues to rapidly grow. Not only is the forex market the largest market in the world, but it is also the most liquid, differentiating it from the other markets. In addition, there is no central marketplace for the exchange of currency, but instead the trading is conducted over-the-counter. Unlike the stock market, this decentralization of the market allows traders to choose from a number of different dealers to make trades with and allows for comparison of prices. Typically, the larger a dealer is the better access they have to pricing at the largest banks in the world, and are able to...

Words: 2316 - Pages: 10

Premium Essay

Foreign Exchange Risk

...MANAGING F OREIGN E XCHANGE R ISK WITH DERIVATIVES by Gregory W. Brown* The University of North Carolina at Chapel Hill May, 2000 Version 3.4 Abstract This study investigates the foreign exchange risk management program of HDG Inc. (pseudonym), an industry leading manufacturer of durable equipment with sales in more than 50 countries. The analysis relies primarily on a three month field study in the treasury of HDG. Precise examination of factors affecting why and how the firm manages its foreign exchange exposure are explored through the use of internal firm documents, discussions with managers, and data on 3110 foreign-exchange derivative transactions over a three and a half year period. Results indicate that several commonly cited reasons for corporate hedging are probably not the primary motivation for why HDG undertakes a risk management program. Instead, informational asymmetries, facilitation of internal contracting, and competitive pricing concerns seem to motivate hedging. How HDG hedges depends on accounting treatment, derivative market liquidity, foreign exchange volatility, exposure volatility, technical factors, and recent hedging outcomes. * Department of Finance, Kenan-Flagler Business School, The University of North Carolina at Chapel Hill, CB 3490 – McColl Building, Chapel Hill, NC 27599-3490. Voice: (919) 962-9250, Fax: (919) 962-2068, Email: A more recent version of this document may be available from my web page:......

Words: 22405 - Pages: 90