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Chapter Three
Chapter Three
Floating Rates
Relationship between major currencies is determined by supply
and demand factors.
FASB No. 52
• Requires a two-transaction perspective.
(1)Account for sale
(2)Account for gains/losses from exchange rate
fluctuations
Foreign Currency Transactions
.
Importing and Exporting Transactions
Inventory delivered
12/10/2009
U.S. firm
Columbia firm
(Teletex)
8,541,000 pesos
received on 1/10/2010
LO 3 Common transactions.
LO 4 Three stages of concern.
Importing and Exporting Transactions
Inventory received
12/12/2009
U.S. firm
Taiwan firm
(Teletex)
500,000 Taiwan dollars
paid on 1/10/2010
Importing and Exporting Transactions
Purchases 19,550
Accounts payable 19,550
2. Speculation
Forward contracts used to speculate changes in foreign currency.
Transaction Transaction
Hedged Item Balance Gain/(Loss) Hedge Balance Gain/(Loss)
Accounts Payable FC Receivable
Dec. 1 $ 26,565 Dec. 1 $ 27,594
Dec. 31 26,439 $ 126 Dec. 31 27,468 $ (126)
Apr. 1 30,030 (3,591) Apr. 1 30,030 2,562
Total gain/(loss) $ (3,465) $ 2,436
Investment in FC 94,700
Firm Commitment 100
Sales (10,000 x 9.48) 94,800
Investment in FC 104,000
Dollars Payable to Exchange Dealer 101,000
Cash 101,000
FC Receivable from Exchange Dealer 104,000
Feb. 1 Equipment 104,000
Investment in FC 104,000
Options, give the holder the advantage of right but not the
obligation to buy or sell the currency.