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Chapter 6
McGraw-Hill/Irwin
6-2
6-3
6-4
Learning Objective 1
6-5
Learning Objective 1
6-6
Learning Objective 1
6-7
Learning Objective 1
6-8
Option contracts
Foreign currency option gives the right, but not the obligation, to
trade foreign currency for some period.
Put option the option to sell the foreign currency.
Call option the option to buy the foreign currency.
Strike price the exchange rate at which currency will be
exchanged when option is exercised.
Learning Objective 1
6-9
Option contracts
Option premium cost of purchasing the option, which is a
function of the options intrinsic value and time value.
Intrinsic value is the gain that could be made by immediate
exercise of the option.
Time value the value that derives from the fact that the currency
value could increase during the remainder of the option period.
Learning Objective 1
6-10
Learning Objective 2
6-11
Learning Objective 2
6-12
Learning Objective 2
6-13
Learning Objective 3
6-14
Learning Objective 3
6-15
Learning Objective 3
6-16
Learning Objective 3
6-17
Learning Objective 3
6-18
Learning Objective 3
100,000
100,000
6-19
Learning Objective 3
90,000
10,000
100,000
6-20
Learning Objective 3
6-21
Learning Objective 3
110,000
110,000
5,000
5,000
6-22
Learning Objective 3
90,000
15,000
105,000
6-23
Learning Objective 4
6-24
Learning Objective 4
6-25
Learning Objective 4
6-26
Learning Objective 4
6-27
Learning Objective 4
6-28
Learning Objective 5
6-29
Hedge Accounting
Learning Objective 6
6-30
Hedge Accounting
Assumptions for examples 1 and 2
December 1, 2007, Joe Inc., a U.S. company, makes a sale and
ships goods to Jose, SA, a Mexican customer.
Sales price is $110,000 (U.S.).
Jose agrees to pay 1,000,000 pesos on March 2, 2008.
Spot rates per peso are: December 1, 2007, $0.11, December 31,
2007, $0.10, and March 2, 2008, $0.095.
The annual interest rate is 6% (0.5% per month).
Learning Objective 6
6-31
Hedge Accounting
Learning Objective 6
6-32
Hedge Accounting
Example 1, FC asset/forward/cash flow hedge
12/01/07
Accounts receivable
Sales
110,000
12/31/07
Foreign exchange loss
Accounts receivable
10,000
10,000
Learning Objective 6
110,000
10,000
10,000
6-33
Hedge Accounting
8,911
Discount expense*
Accumulated Other Comprehensive Income
1,667
8,911
1,667
Learning Objective 6
6-34
Hedge Accounting
5,000
5,000
Forward contract
Accumulated Other Comprehensive Income
1,089
Learning Objective 6
5,000
5,000
1,089
6-35
Hedge Accounting
Learning Objective 6
95,000
105,000
95,000
95,000
10,000
6-36
Hedge Accounting
Example 2, FC asset/forward/fair value hedge
12/01/07
Accounts receivable
Sales
110,000
110,000
12/31/07
Foreign exchange loss
Accounts receivable
Forward contract
8,911
Gain on forward contract
Learning Objective 6
10,000
10,000
8,911
6-37
Hedge Accounting
Learning Objective 6
5,000
1,089
5,000
1,089
6-38
Hedge Accounting
Foreign currency
Forward contract
Learning Objective 6
95,000
105,000
95,000
95,000
10,000
6-39