Chapter 9 - Foreign currency transactions and hedging foreign exchange risk. This chapter covers accounting issues related to foreign currency transactions and foreign currency hedging activities. To provide background for subsequent discussions of the accounting issues, the chapter begins by describing foreign exchange markets. The chapter then discusses accounting for import and export transactions, followed by coverage of various hedging techniques. | Chapter Nine Foreign Currency Transactions and Hedging Foreign Exchange Risk Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Foreign Exchange Rates An Exchange Rate is the cost of one currency in terms of another. Rates published daily in the Wall Street Journal are as of 4:00pm Eastern time on the day prior to publication. The published rates are wholesale rates that banks use with each other – retail rates to consumers are higher. The difference between the rates at which a bank is willing to buy and sell currency is known as the “spread.” Rates change constantly! LO 1 9- Foreign Exchange Rates An Exchange Rate is the cost of one currency in terms of another. Rates published daily in the Wall Street Journal are as of 4:00pm Eastern time on the day prior to publication. The published rates are wholesale rates that banks use with each other – retail rates to consumers are higher. The difference between the rates at which a bank is willing to buy and sell currency is known as the “spread.” Rates change constantly! Foreign Exchange Rates 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 today’s forward rate. 9- Foreign Exchange Rates 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 today’s forward rate. Foreign Currency - Option Contracts A “put” option allows for the sale of foreign currency by the option holder. A “call” option allows for the purchase of foreign currency by the option holder. Remember: An option gives the holder “the right but not the obligation” to trade the foreign currency in the future. 9- Foreign Currency - Option Contracts A “put” option allows for the sale of foreign | Chapter Nine Foreign Currency Transactions and Hedging Foreign Exchange Risk Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Foreign Exchange Rates An Exchange Rate is the cost of one currency in terms of another. Rates published daily in the Wall Street Journal are as of 4:00pm Eastern time on the day prior to publication. The published rates are wholesale rates that banks use with each other – retail rates to consumers are higher. The difference between the rates at which a bank is willing to buy and sell currency is known as the “spread.” Rates change constantly! LO 1 9- Foreign Exchange Rates An Exchange Rate is the cost of one currency in terms of another. Rates published daily in the Wall Street Journal are as of 4:00pm Eastern time on the day prior to publication. The published rates are wholesale rates that banks use with each other – retail rates to consumers are higher. The difference between the rates at which a bank is willing
