Professional Documents
Culture Documents
Foreign
Currency
Transactions
and Hedging
Foreign
Exchange Risk
McGraw-Hill/Irwin
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Spot Rate
The exchange rate that is
available today.
Forward Rate
The exchange rate that
can be locked in today for
an expected future
exchange transaction.
The actual spot rate at the
future date may differ from
todays forward rate.
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Foreign Exchange
Option Contracts
An options contract gives the holder the
option of buying (or selling) currency
units at a future date at the contracted
strike price.
An alternative is an
option contract to
purchase 1,000,000 at
$.0080 US in 30 days.
But it costs $.00002 per
.
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A U.S. company
buys or sells
goods or services
to a party in
another country.
This is often called
foreign trade.
The transaction is
often denominated
in the currency of
the foreign party.
How do we
account for the
changes in the
value of the
foreign currency?
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foreign
currency derivatives
that are often used
to hedge foreign
currency
transactions
Foreign currency
forward contracts
Foreign currency
options
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Cash
Flow
Hedge
Gains/losses are
recorded as
Comprehensive Income
Fair
Value
Hedge
Gains/losses are
recorded on the Income
Statement
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A Cash Flow
Hedge completely
offsets the
variability of a
foreign currency
receivable or
payable.
Fair
Value
Hedge
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Option values
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