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CHAPTER 10
MEASURING ACCOUNTING EXPOSURE
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CHAPTER OVERVIEW
I. ALTERNATIVE MEASURES OF FOREIGN EXCHANGE EXPOSURE
II.
III.
ALTERNATIVE MEASURES OF FOREIGN EXCHANGE EXPOSURE 2. Transaction Exposure: occurs from changes in the value of foreign currency contracts as a result of exchange rate changes.
3. Operating Exposure arises because exchange rate changes may alter the value of future revenues and costs.
Economic Exposure
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.
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4.
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C.
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STATEMENT OF INANCIAL ACCOUNTING STANDARDS NO. 52 E. New Distinction under FASB No. 52: functional v. reporting currency 1. Functional currency for foreign subsidiary = the currency used in the primary economic environment in which it operates.
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2. Reporting currency the currency the parent firm uses to prepare its financial statements.
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STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 52 3. If foreign subsidiary operations are direct extension of parent firm
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TRANSACTION EXPOSURE
II. MEASUREMENT A. Currency by currency B. Equals the difference between 1. The contractually-fixed invoice amount in a specific currency 2. The final payment amount denominated in current exchange rate for the specific currency.
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3.
Exposure netting a. offsetting exposures in one currency with exposures in the same or another currency
b. gains and losses on the two currency positions will offset each other.
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i.e. reduce the level of cash, tighten credit terms to decrease accounts receivable, increase LC borrowing, delay accounts payable, and sell the weak currency forward.
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where
f1 - e1 e0
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1.
A call option
is valuable when a firm has offered to buy a foreign asset at a fixed foreign currency price but is uncertain whether its bid will be accepted.
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