FOREX, Types of Transactions, Foreign Exchange Risk, Exchange Rate, Reasons for Fluctuations, Foreign Currency Revaluation, Importance of Forex Risk Management.

1. Subject: Managerial Economics
Term/Trimester: MBA FIFTH TERM
Year: 2018
PRESENTED BY:
Dipesh Pandey (17321)
Divya Raj Sapkota (17327)
Shishir Sharma (17329)
Sunny Deshar (17308)
Raj Maharjan (17317)

2. FOREX
• What is FOREX?
- Foreign exchange
a)Individuals
b)Companies
- Forex market is open for 24 hours a day for 5 days

3. HOW YOU CAN MAKE PROFIT BY FOREX
TRADING
You have 1000 Euros
Exchange rate 1 Euro = 1.40 USD
1400 USD
1 Euro = 1.30 USD
1076.92 USD
Profit – 76.92 USD

4. HOW YOU CAN MAKE PROFIT BY FOREX
TRADING
You have 1400 USD
Exchange rate 1 Euro = 1.50 USD
1 Euro – 1.50 USD
You get 933.33 Euros
Loss = 66.66 USD

5. TYPES OF TRANSACTIONS
• Spot Rate
• Forward Rate

6. FOREIGN EXCHANGE RISK
• Risk Due To Change In Currency Exchange Rates
• Risk To Importers And Exporters
• Risk To Investors

7. EXCHANGE RATE
• Value of one currency in term of other
• 1 USD = 110.5NRs
• Dollar – rupees exchange rates and indicates the value of Nepali rupees per unit of dollar
• Direct v/s indirect quotation
• Base and counter currency

8. EXCHANGE RATE
• Not Stable
• Fluctuations Due To Demand And Supply Of The Currency
• Demand And Supply Affected By Country’s Macroeconomic Policies And Trade
• Floating V/S Fixed Exchange Rate

9. REASONS FOR FLUCTUATIONS
• Interest Rate
• Money Supply And Inflation
• Balance Of Trade
• Foreign Debt
• Political Conditions
• Speculation
• Quantitative Easing

10. FOREIGN CURRENCY REVALUATION
• Foreign currency revaluation is a treasury concept defining the method by which international
businesses translate the value of all their foreign currency-denominated open accounts – i.e.
Payable and receivable transactions – into the company’s reporting currency. (Kantox)

11. WHY IT IS DONE?
• Accounting regulations require international businesses to keep an updated record of the value of all open
transactions in their reporting currency.
• Payables and receivables due to be settled in foreign currency, these are subject to transaction risk.
• Consolidated financial statement

12. FOREIGN CURRENCY REVALUATION
• At the end of each accounting period, the value of all open transactions is translated into the
reporting currency using the current spot exchange rate. These revaluations generate
differences in the value of the company’s monetary assets and liabilities, which get recorded
under “unrealized gains and losses”.
• When the transaction is settled, the differences in value between the firm sale or purchase
commitment and the payment date are recorded as realized forex gains/losses on the balance
sheet.

13. GENERAL RATES FOR CONSOLIDATION
• Income statement accounts are translated at the average rate for the period.
• Liability and asset accounts (with the exception of fixed assets) are translated at the ending
rate for the period.
• Fixed asset accounts are translated at the original historical rate at which they were acquired.

14. Foreign currency revaluation
ABC starts selling its products abroad.
Accounting or reporting currency : US Dollar (USD)
Foreign currency : EURO ( EUR)
Exchange on a cash basis:
The customer pays 10,000 EUR.
Looking up the exchange rate, we find 1 EUR = 1.5 USD
Trail balance:
ABC Company
Debit Credit
Cash 15,000 USD
Sales 15,000 USD

15. Revaluation of Accounts Receivable
ABC sells the same goods for 10,000 EUR on 15th July.
Again, the exchange rate is 1 EUR = 1.5 USD
Trial
Balance
Acct # Description Debit Credit
11000
Account
Receivable
15,000 USD
40000 Sales 15,000 USD

16. In the month end, we still show 15,000 USD receivable on our
books.
Is that receivable still worth 15,000 USD?
Indeed, if we look at the exchange rate on July 30th, we now
find that 1 EUR = 1.6 USD.
At month end, therefore, we need to book new entry. The entry
affects two accounts.
Journal
Entry
Acct # Description Debit Credit
11000
Accounts
Receivable
1,000 USD
90000
Currency Gain
Loss/Unrealized
1,000 USD

17. Trial Balance
Acct # Description Debit Credit
11000
Account
Receivable
16,000 USD
40000 Sales 15,000 USD
90000
Currency
Gain/Loss
Unrealized
1,000 USD

18.  Let’s say it’s now august 15th and the customer pays us.
 We receive 10,000 EUR.
 Once again, we check the exchange rate. Now, 1 EUR = 1.55 USD.
 So, the payment is worth 15,500 USD, meaning we have a final
realized gain of 500 USD.
Journal Entry
Acct # Description Debit Credit
10000 Cash 15,500 USD
11000
Accounts
Receivable
15,000 USD
90001
Currency Gain
Loss/Realized
500 USD

19. Trial Balance
Acct # Description Debit Credit
10000 Cash 15,500
40000 Sales 15,000 USD
90001
Currency
Gain/Loss
realized
500 USD

20. WHY FOREX RISK MANAGEMENT IS
IMPORTANT?
•There are:
•Real Money
•Real Emotions

21. CONTROLLING LOSSES
•Can be done with:
•Hard Stop
•Mental Stop (Pressure Or Drawdown)

22. USING CORRECT LOT SIZES
•No magic formula that will be exact
•In the beginning, smaller is better (mini lots)

23. TRACKING OVERALL EXPOSURE
•For example:
•If you go short on EUR/USD and long on USD/CHF, you are exposed
two times to the USD and in the same direction.

24. BOTTOM LINE
•Risk management – keeping your risks under control
•Forex trading is about opportunity.

25. THANK
YOU