Fx Transactions Hedging
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1
What do direct quotes indicate?
Number of domestic currency needed to purchase one unit of foreign currency
2
What do indirect quotes indicate?
Number of foreign currency units that could be purchased with one unit of domestic currency
3
What is the spot rate?
The price at which a foreign currency can be purchased or sold today
4
What is the forward rate?
The price available today at which foreign currency can be purchased or sold in the future
5
What type of exposure does an export sale create?
Asset receivable exposure
6
What type of exposure does an import purchase create?
Liability payable exposure
7
Which accounting standard governs foreign currency transactions?
FASB ASC 830-20
8
What perspective does FASB ASC 830-20 require for foreign currency transactions?
The two-transaction perspective
9
When must foreign currency receivables and payables be revalued?
At the balance sheet date
10
Which accounting standard provides guidance for hedges of foreign exchange risk?
FASB ASC 815
11
What are the two types of hedges used for foreign exchange risk?
- Cash flow hedge
- Fair value hedge
- Net investment hedge
12
What does a cash flow hedge protect against?
Changes in cash flows that affect net income
13
What does a fair value hedge protect against?
Changes in the fair value of an asset or liability on the balance sheet
14
What are the two most common derivatives used to hedge foreign exchange risk?
- Foreign currency forward contracts
- Foreign currency options
- Swaps
- Futures
15
What is a foreign currency forward contract?
A binding obligation to exchange foreign currency at a future date
16
What is the up-front cost of entering a forward contract?
Zero
17
What do put options allow for?
The sale of foreign currency
18
What do call options allow for?
The purchase of foreign currency
19
What are the two components that make up an option premium?
- Intrinsic value
- Time value
- Historical cost
- Market rate
20
What is intrinsic value in an option?
The gain that could be realized by exercising the option immediately
21
What happens to the time value of an option over time?
It decreases over time
22
When forward rates exceed spot rates, how is the foreign currency described?
At a premium
23
When forward rates are less than spot rates, how is the foreign currency described?
At a discount
24
What is the strike price in an option?
The exchange rate at which options will be executed
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