Chapter 07 Foreign Currency Transactions and Hedging Foreign Exchange Risk Multiple Choice Questions 1. According to the World Trade Organization, what was the size of international trade in 2008? A) $7,000,000,000 (7 billion dollars) B) $70,000,000,000 (70 billion dollars) C) $37,000,000,000 (37 billion dollars) D) $16,000,000,000,000 (16 trillion dollars) Answer: D Level: Easy LO: 1 2. In the years between 1990 and 2001 when global gross domestic product rose 27%, what was the growth in global exports? A) 25% B) 75% C) 35% D) 50% Answer: B Level: Medium LO: 1 3. What is a “foreign …show more content…
B) It is a transaction that involves payment at a date sometime in the future. C) It is a business deal denominated in a currency other than a company's domestic currency. D) It is an economic event measured in a currency other than U.S. dollars. Answer: C Level: Hard LO: 3 17. What is foreign exchange risk exposure? A) the possibility of a loss because of changes in the value of a foreign currency B) losses caused by paying for purchased goods in a foreign currency C) losses caused by receiving payment in a foreign currency for goods sold D) All of the above Answer: A Level: Hard LO: 2 18. Under U.S. GAAP, what method is required to account for foreign currency transactions? A) A one-transaction perspective must be used. B) The two-transaction perspective must be used. C) A sale is not recorded until payment is received and converted to U.S. dollars. D) A sale is not recorded until payment is received in the foreign currency. Answer: B Level: Medium LO: 3 19. Under International Accounting Standards Board rules, what method is required to account for foreign currency transactions? A) A one-transaction perspective must be used. B) The two-transaction perspective must be used. C) A sale is
Currency risk is the potential risk of loss from fluctuating foreign exchange rates when an investor has exposure to foreign currency or in foreign-currency traded investments.
The Standard Codification ASC 830-230-55-1 is described as follows: ASC is the area of theaccounting standard codification, 830 is the topic “Foreign Currency Matter”, 230 is the subtopic“Statement of Cash Flow”, the number 55 is the section “Implementation Guidance and Illustrations”, and finally the number 1 is the paragraph with an “example of a Statement of Cash Flows for Manufacturing Entity With Foreign Operations”. This organization uses the direct method in their Statement of Cash Flow and it is a U.S. manufacturing organization with international operations. This codification illustrates how companies with foreign operation can operate with different currencies at the same time. The disclosure of the fluctuation of the exchange rate is also included the
Fluctuations in foreign exchange rates may have an adverse impact on profitability and cause cash flow to be somewhat unpredictable for budget planning purposes.
Currency risks are majorly involved with expanding into foreign markets. Due to the fluctuations of exchange rates, apples profits can vary due to demand and supply. The value of a currency is varied due to currency depreciation and appreciation and this fluctuation and
dollars, since shareholders want to have returns on U.S. currency. Several factors distinguished financial management by domestic firms from multinational corporations by different currency, and different economic and legal structures. It’s important to understand direct quotation, and indirect quotation which might affect the company’s overall revenue. Since, the currency of the dollar changes, it might require higher rates on foreign projects. We need to take into consideration political risk and exchange rate risk. Since, government actions can decrease the value of the investment. Or generate losses due to fluctuations in the value of the
Foreign exchange risk is commonly defined as the additional variability experienced by a multinational corporation in its worldwide-consolidated earnings that results from unexpected currency fluctuations (Jacques, 1981). Multinational businesses exporting or importing goods and services or making foreign investments throughout the global economy are faced with an exchange rate risk, which can have severe financial consequences if not managed appropriately.
Answer: To characterize the risk of a currency position, you must try to characterize the conditional distribution of the future exchange rate changes. With floating exchange rates, historical information provides useful information about this distribution. For example, you can use data to measure the average historical dispersion (standard deviation or volatility) of the distribution. The higher this volatility, the riskier are positions in this currency. It is also possible to rely on more forward-looking information using the options markets (see Chapter 20). Finally, we should point out that volatility
Exchange rates also impact on the current account balance. A depreciation in the exchange rate
Example: U.S. Exporter agrees in a contract to sell beef to a buyer in Japan for ¥500 / lb. in 6 months. If the e = ¥100 / $, the U.S. exporter receives $5/lb. If e = ¥80 / $, (dollar weakens, Yen strengthens), the exporter gets $6.25/lb. If e = 125Yen/$ (dollar strengthens, Yen weakens) he gets $4/lb. Range for the sales revenue is between $4.00-6.25/lb. Currency risk for the exporter is that the Yen could weaken over the next six months, dollar strengthen. RISK FOR EXPORTER: They are receiving a fixed amount of foreign currency in the future, they are worried about the foreign currency getting weaker in the future, meaning fewer dollars in the future for the sale of the exported product.
Understanding the relationships among world currencies is vital to successful operations in a global economy. There is money to be made by managers who can effectively manage exchange rates in the course of their business dealings. There is money to be lost by managers who fail to recognize the significance of these rate relationships.
There are international markets where the internationally accepted currency is a trade. Such currency is deposited with
economic value measured in monetary terms between various nations. As a result of a possible
Table 1 Exports of goods and services (% of GDP) - Imports of goods and services (% of GDP) = Net exports (% of GDP) 1970-1980
There is a risk that a business ' operations or an investment 's value will be affected by changes in exchange rates. For example, if money must be concerted into a different currency to make a certain investment, changes in the value of the currency relative to the American dollar will affect the total loss or gain on the investment when the money is converted back. This risk usually affects businesses, but it can also affect individual investors who make international investments, also called currency risk (Investorworld).
As an International trade corporation, we buy goods in foreign countries and sell it to other countries for a price difference and so to gain profit. The cost of purchasing goods in foreign countries are the majority part of our cost. The cost of purchasing goods in a foreign would fluctuate as the exchange rate of that country fluctuate. Most of times, one country’s exchange rate can be very volatile in the short term. Sometimes it is beneficial to our profit but sometimes it can cause increasing in our cost. When the exchange rate went to the direction that we don 't want it to be, the price difference advantages we have gained from purchasing goods in foreign countries would be eroded and it would eventually hurt our profit from selling goods in our country or other countries.