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Lecture International accounting (3/e): Chapter 7 - Timothy Doupnik, Hector Perera

Chapter 7 - Foreign currency transactions and hedging foreign exchange risk. The main contents of the chapter consist of the following: Foreign exchange markets, foreign exchange risk, accounting for foreign currency transactions, hedging, foreign currency forward contracts and options, accounting for hedges, cash flow hedges and fair value hedges. | Chapter Topics Foreign exchange markets Foreign exchange risk Accounting for foreign currency transactions Hedging Foreign currency forward contracts and options Accounting for hedges Cash flow hedges and fair value hedges Learning Objectives Provide an overview of the foreign exchange market. Explain how fluctuations in exchange rates give rise to foreign exchange risk. Demonstrate the accounting for foreign currency transactions. Describe how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange risk. Describe the concepts of cash flow hedges, fair value hedges, and hedge accounting. Demonstrate the accounting for forward contracts and options used as cash flow hedges and fair value hedges to hedge foreign currency assets and liabilities, foreign currency firm commitments, and forecasted foreign currency transactions. Learning Objective 1 Foreign exchange rate Purchase price of a foreign currency-- e.g., in February 2010 it cost about 0.08 U.S. dollars (eight cents) to purchase one Mexican peso. From 1945 to 1973 countries had exchange rates fixed to the U.S. dollar. U.S. dollar was fixed to gold at $35 per ounce. Balance-of-payments deficits in the U.S. during the 1960s doomed this system, so, by March 1973 most currencies were allowed to float in value. Exchange Rate Mechanisms Independent float – currency value allowed to move freely with little government intervention. Pegged to another currency – currency value fixed (pegged) in terms of a particular foreign currency (e.g., U.S. dollar), and central bank intervenes to maintain the exchange rate. European Monetary System (Euro) – twelve countries use a single currency, which floats against other currencies such as the U.S. dollar. Learning Objective 1 Foreign Exchange Rates Exchange rates, to the U.S. dollar, are published in many places on the internet and in newspapers. Exchange rates are reflected both as US $ equivalent (direct quotes) and . | Chapter Topics Foreign exchange markets Foreign exchange risk Accounting for foreign currency transactions Hedging Foreign currency forward contracts and options Accounting for hedges Cash flow hedges and fair value hedges Learning Objectives Provide an overview of the foreign exchange market. Explain how fluctuations in exchange rates give rise to foreign exchange risk. Demonstrate the accounting for foreign currency transactions. Describe how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange risk. Describe the concepts of cash flow hedges, fair value hedges, and hedge accounting. Demonstrate the accounting for forward contracts and options used as cash flow hedges and fair value hedges to hedge foreign currency assets and liabilities, foreign currency firm commitments, and forecasted foreign currency transactions. Learning Objective 1 Foreign exchange rate Purchase price of a foreign currency-- e.g., in February 2010 it .