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Chapter Nine
Foreign
Currency
Transactions
and Hedging
Foreign
Exchange Risk
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
9-2
Exchange Rate Mechanisms



Prior to 1973,
currency values were
generally fixed. The
US $ was based on
the Gold Standard.
Since 1973, exchange
rates have been
allowed to fluctuate.
Several valuation
models exist.
9-3
Different Currency Mechanisms

Independent Float (the currency is allowed to
fluctuate according to market forces)
 Pegged to another currency (the currency’s
value is fixed in terms of a particular foreign
currency, and the central bank will intervene
to maintain the fixed value)
 European Monetary System – A common
currency (the euro) is used in different
countries. Its value floats against other
world currencies.
9-4
Foreign Exchange Markets



Countries use currencies
for internal economic
transactions.
To make transactions in
another country, units of
that country’s currency
may need to be acquired.
The price at which a
currency can be acquired
is known as the “exchange
rate.”
9-5
Foreign Exchange Rates

Exchange rates are
published daily in the
Wall Street Journal.
 These are “end-of-day”
rates, as of 4:00pm Eastern
time on the day prior to
publication


Remember – Rates
change constantly
The difference between
the rates at which a bank
is willing to buy and sell
currency is known as the
“spread.”
9-6
Foreign Exchange Rates
As the relative strength
of a country’s economy
changes . . .
. . . the exchange rate of
the local currency
relative to other
currencies also
fluctuates.
?¥ = $?
9-7
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.
9-8
Foreign Exchange Forward
Contracts
A forward contract requires the purchase (or sale)
of currency units at a future date at the contracted
exchange rate.
This forward contract
allows us to purchase
1,000,000 ¥ at a price
of $.0080 US in 30
days.
But if the spot rate is
$.0069 US in 30 days,
we still have to pay
$.0080 US and we
lose $1,100!!
9-9
Foreign Exchange Options
Contracts
An options contract gives the holder the option of
buying (or selling) the currency units at a future
date at the contracted “strike” price.
An alternative is an
option contract to
purchase 1,000,000 ¥
at $.0080 US in 30
days. But it costs
$.00002 per ¥.
That way, if the spot
rate is $.0069 in 30
days, we only lose
the $20 cost of the
option contract!
9-10
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.)
9-11
Foreign Currency Transactions


A U.S. company
buys or sells goods
or services to a
party in another
country. This is
often called “foreign
trade.”
The transaction is
often denominated
in the currency of
the foreign party.
The major
accounting issue:
How do we account
for the changes in
the value of the
foreign currency?
9-12
Foreign Currency Transactions
FASB No. 52
Requires a two-transaction
perspective.
(1) Account for the original
sale in US $
(2) Account for gains/losses
from exchange rate
fluctuations.
9-13
Foreign Currency Transactions
When a transaction
occurs on one date
(for example a
credit sale) . . .
. . . but the cash flow
is at a later date . . .
. . . fluctuating
exchange rates can
result in exchange
rate gains or losses.
1/23/07 1 £ = $1.9818 US
2/23/07 1 £ = $1.9635 US
?
9-14
Foreign Currency Transactions
When the rate is
expressed as the US $
equivalent of 1 unit of
foreign currency, the
rate is called a
“DIRECT QUOTE”
1/23/07 1 £ = $1.9818 US
2/23/07 1 £ = $1.9635 US
?
9-15
Foreign Currency Transactions
When the rate is
expressed as the US $
equivalent of 1 unit of
foreign currency, the
rate is called a
“DIRECT QUOTE”
When the rate is
expressed as the
number of foreign
currency units that $1
will buy, the rate is
called an
“INDIRECT QUOTE”
1/23/07 1 £ = $1.9818 US
2/23/07 1 £ = $1.9635 US
1/23/07 .5046 £ = $1 US
2/23/07 .5093 £ = $1 US
Foreign Exchange Transaction
Example
9-16
On 12/1/08, Nuuk sells inventory to Coventry
Corp. on credit. Coventry will pay Nuuk
10,000 British pounds in 90 days.
The current exchange rate is $1 = .6425 £.
Prepare Nuuk’s journal entry.
Nuuk's
General
Journal
BOBCO's
GENERAL
JOURNAL
Date
Dec
Description
1 A/R (to be collected in £)
Sales
10,000£ ÷ .6425 = $15,564
amounts rounded
Page
Debit
34
Credit
15,564
15,564
Foreign Exchange Transaction
Example
9-17
On 12/31/08, the exchange rate is $1 = .6400 £.
At the balance sheet date we have to
“remeasure”, or adjust, the original A/R to
the current exchange rate.
Nuuk's General
Journal
BOBCO's
GENERAL
JOURNAL
Date
Description
Dec 31 A/R
Foreign Exchange Gain
$15,564 - (10,000£ ÷ .6400)
amounts rounded
Page
Debit
34
Credit
61
61
Foreign Exchange Transaction
Example
9-18
On 3/1/09, Coventry Corp. pays Nuuk the
10,000 £ for the 12/1/08 sale.
The exchange rate on 3/1/09, was $1 = .6500 £.
On 3/1/09, we have to do TWO things.
First, we must “remeasure” the A/R.
Nuuk's General
Journal
BOBCO's
GENERAL
JOURNAL
Date
Mar
Description
1 Foreign Exchange Loss
A/R
$15,625 - (10,000£ ÷ .6500)
amounts rounded
Page
Debit
34
Credit
240
240
Foreign Exchange Transaction
Example
9-19
On 3/1/09, Coventry Corp. pays Nuuk the
10,000 £ for the 12/1/08 sale.
The exchange rate on 3/1/09, was $1 = .6500 £.
On 3/1/09, we have to do TWO things.
Second, we must record receipt of the £.
Nuuk's General
Journal
BOBCO's
GENERAL
JOURNAL
Date
Mar
1 Cash
A/R
Description
Page
Debit
34
Credit
15,385
15,385
9-20
Hedging Foreign Exchange Risk

Companies will seek to reduce the
risks associated with foreign currency
fluctuations by “hedging” their
exposure
 This means surrendering a portion of
potential gains to offset possible
losses by entering into a potential
transaction whose exposure is the
opposite of that for the existing
transaction.
9-21
Hedging Foreign Exchange Risk
To control for the risk of
exchange rate fluctuation,
a forward contract for
currency can be
purchased.
Hedging effectively
reduces the
uncertainty associated
with fluctuating
exchange rates.
9-22
Hedging Foreign Exchange Risk

To hedge a foreign
currency
transaction,
companies may use
foreign currency
derivatives
 Two common tools:
 Foreign currency
forward contracts
 Foreign currency
options
9-23
Accounting for Derivatives
SFAS 133 provides guidance for hedges of
four types of foreign exchange risk.
Recognized
foreign currency
denominated
assets &
liabilities.
Unrecognized
foreign currency
firm
commitments.
Forecasted
foreign currency
denominated
transactions.
Net investments
in foreign
operations
9-24
Accounting for Derivatives



Often a transaction involving a
credit sale/purchase is
denominated in a foreign
currency.
On the transaction date, the
foreign currency
receivable/payable is recorded.
If a forward contract is entered
into to hedge the transaction,
SFAS No. 133 requires the
forward contract be carried at
FAIR VALUE.
?
9-25
Determining the Value of
Derivatives
To determine the value of
foreign currency derivatives,
the company needs 3 basic
pieces of information:
(1) The forward rate when the
forward contract was entered
into.
(2) The current forward rate for a
contract that matures on the
same date as the forward
contract.
(3) A discount rate.
9-26
Accounting for Hedges
As the Fair Value of a forward contract
changes, gains or losses are recorded.
On 12/31/08, Chan has a
forward contract to deliver
500,000¥ to Inuwashi Company
on 1/31/09 at 120¥ = $1. The
available 31-day forward rate
on 12/31/08 is 122.50¥ = $1.
Chan uses a discount rate of
6%. What is the value of the
forward contract on 12/31/08?
$-value of the
500,000¥ at the
currently available
forward rate
$-value of the
500,000¥ at the
contracted rate
Loss on Forward
Contract
?
The present value
at 12/31/08
$
4,082
4,167
$
85
$ 84.6110
9-27
Accounting for Hedges
There are two ways that a foreign currency
hedge can be accounted for.
Cash
Flow
Hedge
Fair
Value
Hedge
Gains/losses are
recorded as
Comprehensive Income
Gains/losses are
recorded on the Income
Statement
Cash Flow Hedge - Date of
Transaction Example
9-28
On 4/1/08, Madh, Inc., a U.S. maker of auto
parts, purchases parts from Caracol
Company in Mexico for 100,000 Pesos on
credit. Payment is due in 180 days (October
8, 2008).
The current exchange rate is $1 = 9.5000 pesos.
Prepare Madh’s journal entry on 4/1/08.
MPG,
Inc.
General
Journal
Madh's
General
Journal
Date
Apr
1
Description
Purchases
A/P
Amounts rounded
Page
Debit
18
Credit
10,526
10,526
Cash Flow Hedge - Date of
Transaction Example
9-29
Assume that Madh takes a 180-day
forward contract to buy 100,000
pesos. The forward contract rate is
9.7400 pesos = $1.
Madh's General Journal
Date
Description
Page
Debit
This is an executory contract, so
no entry is made on the contract
date.
18
Credit
Cash Flow Hedge - Interim
Reporting Date Example
9-30
At Madh’s year-end, 6/30/08, the value of the
foreign currency payable must be remeasured, or adjusted, based on the 6/30/08
spot rate of $1 = 9.5250 pesos.
1. Remeasure the original payable:
Madh's
General
Journal
MPG,
Inc.
General
Journal
Date
Description
Jun 30 A/P (pesos)
Foreign Exchange Gain
100,000 ÷ 9.525 = $10,499
$10,526 - $10,499 = 27
Amounts rounded
Page
Debit
25
Credit
27.00
27.00
Cash Flow Hedge - Interim
Reporting Date Example
9-31
2. In addition, we record an entry to
Accumulated Other Comprehensive
Income (AOCI) to offset the exchange
gain/loss associated with the original
transaction.
MPG, Inc. General Journal
Date
Description
Jun 30 Foreign Exchange Loss
AOCI
Page
Debit
25
Credit
27.00
27.00
Cash Flow Hedge - Interim
Reporting Date Example
9-32
Also, on 6/30/08, the forward contract must
be recorded. The available forward rate to
October 8, 2008 is $1 = 9.6200 pesos.
Madh uses a 6% discount rate.
3. Record the forward contract:
Madh's
General
Journal
MPG,
Inc.
General
Journal
Date
Description
Jun 30 Forward Contract
AOCI
at the 90-Day Rate = $10,395
at the Contract Rate = $10,267
PV factor = .9851
Page
Debit
25
Credit
126.09
126.09
Cash Flow Hedge - Interim
Reporting Date Example
9-33
4. Finally, we have to amortize the discount
from the original transaction date.
In the original transaction, we had a discount
of $11 ($10,267 - $10,256). Amortize the
discount using the straight-line method.
MPG, Inc. General Journal
Date
Description
Jun 30 Discount Expense
AOCI
Page
Debit
25
Credit
5.50
5.50
Cash Flow Hedge - Date of
Collection Example
9-34
On 10/8/08, both the original receivable and the
exchange contract come due. Assume the
10/8/08 exchange rate is $1 = 9.4000 pesos.
1. Remeasure the Accounts Payable:
MPG, Inc. General Journal
Date
Oct
Description
8 Foreign Exchange Loss
Accounts Payable
100,000 ÷ 9.4000 = $10,638
$10,638 - $10,499 = $139
Page
Debit
40
Credit
139
139
Cash Flow Hedge - Date of
Collection Example
9-35
2. As at year-end, Madh must
record an entry to offset the
foreign exchange loss of $139.
Madh's
General
Journal
MPG,
Inc.
General
Journal
Date
Oct
Description
8 AOCI
Foreign Exchange Gain
Page
Debit
25
Credit
139
139
Cash Flow Hedge - Date of
Collection Example
9-36
On 10/8/08, both the original payable and the
exchange contract come due. The 10/8/08
exchange rate is $1 = 9.4000 pesos. .
3. Adjust the Forward Contract:
MPG, Inc. General Journal
Date
Oct
Description
Page
Debit
8 Forward Contract
244.91
AOCI
at the Current Rate = $10,638
at the Contract Rate = $10,267
Current Forward Contract = $126.09
25
Credit
244.91
Cash Flow Hedge - Date of
Collection Example
9-37
4. Finally, Madh must amortize the rest of the
discount from the original transaction date.
In the original transaction, Madh had a
discount of $11 ($10,267 - $10,256). The
discount is amortized using the straightline method.
Madh's
General
Journal
MPG,
Inc.
General
Journal
Date
Oct
Description
8 Discount Expense
AOCI
Page
Debit
25
Credit
5.50
5.50
Cash Flow Hedge - Date of
Collection Example
9-38
On 10/8/08, both the original payable and the
exchange contract come due. The 10/8/08
exchange rate is $1 = 9.4000 pesos.
5. Purchase the 100,000 pesos:
MPG, Inc. General Journal
Date
Oct
Description
8 Foreign Currency (pesos)
Cash
Page
Debit
40
Credit
10,267
10,267
Cash Flow Hedge - Date of
Collection Example
9-39
On 10/8/08, both the original payable and the
exchange contract come due. The 10/8/08
exchange rate is $1 = 9.4000 pesos.
6. Complete the Forward Contract Payable:
Madh's General Journal
Date
Oct
Description
Page
Debit
8 A/P (pesos)
10,638
Forward Contract
Foreign Currency (pesos)
40
Credit
371
10,267
Fair Value Hedge - Date of
Transaction Example
9-40
On 12/1/08, Castor Co., a U.S. confectioner
sells cookies to L’Orignal, a French
company, for 20,000 Euro’s (€) on credit.
Payment is due in 90 days (March 1, 2009).
Assume the current exchange rate is $.9700 = 1
€.
Prepare Castor Co.’s journal entry.
Castor's
General
Journal
BALLOON
CO. GEN'L
JOURNAL
Date
Dec
Description
1 A/R (€) (rounded)
Sales
Page
Debit
18
Credit
19,400
19,400
Fair Value Hedge - Date of
Transaction Example
9-41
Castor Co. buys a 90-day forward
contract to pay 20,000 €. Castor
contracts for the 90-day forward rate
on 12/1/08 at $.9500 = 1 €.
Castor's General Journal
Date
Description
Page
Debit
This is an executory contract, so
no entry is made on the contract
date.
18
Credit
Fair Value Hedge - Interim
Reporting Date Example
9-42
On 12/31/08, the value of the foreign currency
receivable must be adjusted based on the
12/31/08 spot rate of $.9650 = 1 €.
 Adjust the original receivable:
BALLOON CO. GEN'L JOURNAL
Date
Description
Dec. 31 Foreign Exchange Loss
Accounts Receivable (€)
20,000 x .9650 = $19,300
$19,400 - $19,300 = 100
Page
Debit
25
Credit
100.00
100.00
Fair Value Hedge - Interim
Reporting Date Example
9-43
Also, on 12/31/08, the forward contract
must be recorded. The available
forward rate to March 1, 2009 is $.9520
= 1 €. Castor uses a 6% discount rate.
Record the forward contract:
Castor's General
Journal
BALLOON
CO. GEN'L
JOURNAL
Date
Description
Dec. 31 Loss on Forward Contract
Forward Contract
at the 60-Day Rate = $19,040
at the Contract Rate = $19,000
PV factor = .9901
Page
Debit
25
Credit
40
40
Fair Value Hedge - Date of
Collection Example
9-44
On 3/1/09, both the original receivable and the
forward contract come due. The 3/1/09
exchange rate is $.9540 = 1 €.
1. Adjust the Accounts Receivable:
Castor's
General
Journal
BALLOON
CO. GEN'L
JOURNAL
Date
Mar
Description
1 Foreign Exchange Loss
Accounts Receivable
20,000 x .9540 = $19,080
$19,300 - $19,080 = $220
Page
Debit
40
Credit
220
220
Fair Value Hedge - Date of
Collection Example
9-45
On 3/1/09, both the original receivable and the
forward contract come due. The 3/1/09
exchange rate is $.9540 = 1 €.
 Adjust the Forward Contract Payable:
Castor's
General
Journal
BALLOON
CO. GEN'L
JOURNAL
Date
Mar
Description
1 Loss on Forward Contract
Forward Contract
at the Spot Rate = $19,080
at the Contract Rate = $19,000
Forward Contract on 12/31 = 39.60
Page
Debit
40
Credit
40.40
40.40
Fair Value Hedge - Date of
Collection Example
9-46
On 3/1/09, both the original receivable and the
forward contract come due. The 3/1/09
exchange rate is $.9540 = 1 €.
3. Collect the 20,000 € in settlement of the
Account Receivable:
Castor's
General
Journal
BALLOON
CO. GEN'L
JOURNAL
Date
Mar
Description
1 Foreign Currency (€)
Accounts Receivable (€)
Page
Debit
40
Credit
19,080
19,080
Fair Value Hedge - Date of
Collection Example
9-47
On 3/1/09, both the original receivable and the
forward contract come due. The 3/1/09
exchange rate is $.9540 = 1 €.
4. Complete the Forward Contract:
Castor's
General
Journal
BALLOON
CO. GEN'L
JOURNAL
Date
Mar
Description
1 Cash ($)
Forward Contract
Foreign Currency (€)
Page
Debit
40
Credit
19,000
80
19,080
9-48
Using a Foreign Currency Option
as a Hedge

An option is a
contract that
allows you to
exercise a
predetermined
exchange rate if
it is to your
advantage.
 Options carry a
cost.
9-49
Using a Foreign Currency Option
as a Hedge
As with forward
contracts, options can
be designed as cash
flow hedges or fair
value hedges.
Option prices are
determined using the
Black-Scholes Option
Pricing Model covered
in most finance texts.
9-50
Option values

Derived from a function combining:
 The difference between current spot rate
and strike price
 The difference between foreign and
domestic interest rates
 The length of time to option expiration
 The potential volatility of changes in the
spot rate
9-51
Using a Foreign Currency Option
as a Hedge
SFAS 133 requires that the
option be carried at fair
value on the balance sheet.
Option fair values are
determined by examining
the current quotes for
similar options and
breaking the fair value into
two components:
Intrinsic Value & Time
Value
9-52
Hedge of a Foreign Currency Firm
Commitment
Occurs when a company hedges a
transaction that has yet to take place.
Example
Ruff Wood orders
1,000,000 board feet
of lumber from Brazil.
Ruff Wood enters the
hedge contract on the
same day as the order
is placed.
Under fair value hedge
accounting:
(1) The gain/loss on the hedge is
recognized currently in net income.
(2) The gain/loss on the firm
commitment attributable to the
hedged risk is also recognized
currently in net income.
Foreign Currency Firm
Commitment - Example
9-53
On December 1, 2008, Mawr receives an
order from a German customer. The
delivery date is March 1, 2009, when Mawr
will receive immediate payment.
The sale is three months away, Mawr has a
firm commitment to make the sale and
receive payment of 1,000,000 €.
Mawr decides to hedge this commitment.
Mawr's General Journal
Date
Description
Page
Debit
These are executory contracts, so
no entries are made on this date.
18
Credit
Foreign Currency Firm
Commitment - Example
9-54
Mawr will receive 1,000,000 € on March 1,
2009. A forward contract was entered
into to sell the euros at a price of $.905 =
1 €. Mawr’s discount rate is 12%.
On 12/31/08, the currently available forward
rate is $.916 = 1 €.
1. Record the forward contract.
Mawr's General Journal
Date
Description
Page
Debit
18
Credit
Foreign Currency Firm
Commitment - Example
9-55
1,000,000 € @ the contract rate of $.905
$
905,000
1,000,000 € @ the currently available forward rate
of $.916
$
916,000
Difference attributed to loss on forward contract
$
(11,000)
Time value factor at the discount rate of 12%
12/31/08 fair value of the forward contract.
Mawr's General
Amerco
GeneralJournal
Journal
Date
Description
Dec 31 Loss on Forward Contract
Forward Contract
0.9803
$
(10,783)
Page
Debit
18
Credit
10,783
10,783
Foreign Currency Firm
Commitment - Example
9-56
Mawr will receive 1,000,000 € on March 1,
2009. A forward contract was entered
into to sell the euros at a price of $.905 =
1 €. Mawr’s discount rate is 12%.
On 12/31/08, the currently available forward
rate is $.916 = 1 €.
2. Record the firm commitment.
Mawr's General
Amerco
GeneralJournal
Journal
Date
Dec
Description
31 Firm Commitment
Gain on Firm Commitment
Note that this entry effectively
offsets the loss on the forward
contract.
Page
Debit
18
Credit
10,783
10,783
Foreign Currency Firm
Commitment - Example
9-57
On March 1, 2009, Mawr receives 1,000,000
€ from the German customer upon
delivery of the order. On 3/1/09, the spot
rate is $.900 = 1 €.
1. Adjust the forward contract to its
current value of $5,000.
Mawr's General
Amerco
GeneralJournal
Journal
Date
Mar
Description
1 Forward Contract
Gain on Forward Contract
Page
Debit
18
Credit
15,783
15,783
Foreign Currency Firm
Commitment - Example
9-58
On March 1, 2009, Mawr receives 1,000,000
€ from the German customer upon
delivery of the order. On 3/1/09, the spot
rate is $.900 = 1 €.
2. Record an offsetting loss associated
with the Firm Commitment.
Mawr's General
Amerco
GeneralJournal
Journal
Date
Mar
Description
1 Loss on Firm Commitment
Firm
Commitment
Note
that
the balance in the
Firm Commitment is now
$5,000 CR.
Page
Debit
18
Credit
15,783
15,783
Foreign Currency Firm
Commitment - Example
9-59
On March 1, 2009, Mawr receives 1,000,000
€ from the German customer upon
delivery of the order. On 3/1/09, the spot
rate is $.900 = 1 €.
3. Record the receipt of the foreign
currency.
Mawr's General
Amerco
GeneralJournal
Journal
Date
Mar
Description
1 Foreign Currency (€)
Sales
Page
Debit
18
Credit
900,000
900,000
Foreign Currency Firm
Commitment - Example
9-60
On March 1, 2009, Mawr receives 1,000,000
€ from the German customer upon
delivery of the order. On 3/1/09, the spot
rate is $.900 = 1 €.
4. Record the fulfillment of the forward
contract.
Mawr's General
Amerco
GeneralJournal
Journal
Date
Mar
Description
1 Cash
Forward Contract
Foreign Currency
Page
Debit
18
Credit
905,000
5,000
900,000
Foreign Currency Firm
Commitment - Example
9-61
On March 1, 2009, Mawr receives 1,000,000
€ from the German customer upon
delivery of the order. On 3/1/09, the spot
rate is $.900 = 1 €.
5. Close the Firm Commitment to Net
Income.
Mawr's General
Amerco
GeneralJournal
Journal
Date
Mar
Description
1 Firm Commitment
Adjustment to Net Income
Page
Debit
18
Credit
5,000
5,000
9-62
Hedge of a Forecasted Foreign
Currency Denominated Transaction

SFAS 133 allows the use of cash flow
hedge accounting for foreign currency
derivatives associated with a
forecasted foreign currency
transaction
 The forecasted transaction must be
probable
 The hedge must be highly effective
 The hedging relationship must be
properly documented
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Hedge of a Forecasted Foreign
Currency Denominated Transaction

Accounting for a hedge of a forecasted
transaction differs from that for a foreign
currency firm commitment:
 There is no recognition of the forecasted
transaction or gains and losses on it.
 The company reports the hedging instrument at
fair value, but does not report changes in the fair
value of the hedging instrument as gains and
losses in net income. Instead, they are recorded in
other comprehensive income. On the projected
date of the forecasted transaction, the cumulative
change in the fair value of the hedging instrument
is transferred from other comprehensive income to
net income.
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An Interesting Footnote
When foreign currency loans are made
on a long-term basis to a foreign
branch, subsidiary or equity method
affiliate, SFAS 52 requires that foreign
exchange gains and losses be
deferred in other comprehensive
income until the loan is repaid. Only
the forex gains and losses related to
the interest receivable are currently
recorded in net income.
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Summary



The existence of different currencies creates
an accounting challenge when transactions
are denominated in currencies different from
those used to keep accounting records
FASB has adopted a “two-transaction”
approach, separating the actual sale or
purchase transaction from the currency
exchange “speculation”
A variety of hedging practices may be used
to reduce foreign currency exchange risk.
The two most popular hedging instruments
are foreign currency options and foreign
currency forward contracts
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Possible Criticisms
Some critics deride the “two transaction”
approach adopted by the FASB, arguing that
a single transaction has actually occurred.
 Some financial experts feel that the FASB’s
definition of what constitutes a hedge is far
too narrow.
 There is considerable controversy
concerning the appropriate means of valuing
options.

WHAT DO YOU THINK???