The document discusses the difference between the current rate translation method and the temporal method for foreign currency translation. It also discusses the differences between FASB Statements No. 8 and No. 52 regarding translation methods.
The key differences between the current rate method and temporal method are:
- The current rate method translates assets/liabilities at current rates and revenues/expenses at average rates, while the temporal method translates some accounts at historical rates.
- FAS 52 allows more flexibility in selecting the functional currency compared to FAS 8, but it also provides more scope for manipulation and reduces comparability between firms.
FAS 52 uses the current rate method as the basic rule for subsidiaries in low inflation
This document provides an overview of foreign exchange and derivatives. It discusses key concepts like foreign exchange rates being affected by factors like balance of payments, economic growth rates, and interest rates. It also covers forex derivatives, risks in forex operations like credit risk, settlement risk and gap risk. Correspondent banking relationships and Nostro accounts are explained. Derivatives are defined as instruments that can neutralize or alter risk exposure profiles. The roles of entities like banks, money changers, and the Clearing Corporation of India in forex markets are outlined.
This chapter discusses long-term financing options for multinational corporations (MNCs), including issuing bonds denominated in foreign currencies. It explains that MNCs must forecast exchange rates and interest rates to evaluate the costs and risks of foreign currency financing. The chapter also covers how MNCs can use techniques like hedging with currency swaps or interest rate swaps to reduce exchange rate and interest rate risks from long-term financing denominated in foreign currencies.
This document discusses short-term asset and liability management for multinational corporations (MNCs). It shows that MNC subsidiaries with excess funds can deposit money in the eurocurrency market or lend to other MNC subsidiaries with deficiencies. The parent MNC can also borrow funds in the international commercial paper market. Short-term financing options help MNCs efficiently manage cash flows across borders.
This chapter discusses various forms of multinational restructuring that multinational corporations undertake, including international acquisitions, divestitures, alliances, and shifting production among subsidiaries. It explains how MNCs evaluate and value potential foreign acquisition targets, which can vary depending on estimated cash flows, exchange rates, and required rates of return. The chapter also covers other methods of multinational restructuring such as partial acquisitions and privatized businesses, and treats restructuring decisions as real options problems.
Accounting and reporting for foreign currenciesWubeshetKifle
This document discusses accounting and reporting for foreign currencies. It covers key concepts like foreign exchange rates, foreign currency transactions, accounting for imports and exports, and accounting standards. The two-transaction perspective requires companies to account for foreign currency sales and subsequent cash collections as separate transactions. Exchange differences from changing rates are reported as foreign exchange gains or losses. Journal entries are provided to illustrate accounting for a sample import transaction over multiple periods as the exchange rate fluctuates.
The document discusses financing as a marketing tool for exports. It covers various financing options for export orders like letters of credit, advances, and factoring. It also describes the roles of institutions that provide export financing like commercial banks, the Reserve Bank of India, Export-Import Bank of India, and discusses facilities like pre-shipment financing, post-shipment financing, and project financing. Islamic banking methods for export financing using concepts like Musharakah and Murabahah are also summarized.
International foreign exchange transactions involve two steps: 1) purchasing foreign currency and 2) using that foreign currency to purchase goods or services abroad. Foreign exchange refers to foreign currencies and the exchange of one currency for another. The foreign exchange market exists globally to facilitate international trade and investment needs, trading over $1.5 trillion daily between central banks, corporations, banks, and individuals.
This document provides an overview of foreign exchange and derivatives. It discusses key concepts like foreign exchange rates being affected by factors like balance of payments, economic growth rates, and interest rates. It also covers forex derivatives, risks in forex operations like credit risk, settlement risk and gap risk. Correspondent banking relationships and Nostro accounts are explained. Derivatives are defined as instruments that can neutralize or alter risk exposure profiles. The roles of entities like banks, money changers, and the Clearing Corporation of India in forex markets are outlined.
This chapter discusses long-term financing options for multinational corporations (MNCs), including issuing bonds denominated in foreign currencies. It explains that MNCs must forecast exchange rates and interest rates to evaluate the costs and risks of foreign currency financing. The chapter also covers how MNCs can use techniques like hedging with currency swaps or interest rate swaps to reduce exchange rate and interest rate risks from long-term financing denominated in foreign currencies.
This document discusses short-term asset and liability management for multinational corporations (MNCs). It shows that MNC subsidiaries with excess funds can deposit money in the eurocurrency market or lend to other MNC subsidiaries with deficiencies. The parent MNC can also borrow funds in the international commercial paper market. Short-term financing options help MNCs efficiently manage cash flows across borders.
This chapter discusses various forms of multinational restructuring that multinational corporations undertake, including international acquisitions, divestitures, alliances, and shifting production among subsidiaries. It explains how MNCs evaluate and value potential foreign acquisition targets, which can vary depending on estimated cash flows, exchange rates, and required rates of return. The chapter also covers other methods of multinational restructuring such as partial acquisitions and privatized businesses, and treats restructuring decisions as real options problems.
Accounting and reporting for foreign currenciesWubeshetKifle
This document discusses accounting and reporting for foreign currencies. It covers key concepts like foreign exchange rates, foreign currency transactions, accounting for imports and exports, and accounting standards. The two-transaction perspective requires companies to account for foreign currency sales and subsequent cash collections as separate transactions. Exchange differences from changing rates are reported as foreign exchange gains or losses. Journal entries are provided to illustrate accounting for a sample import transaction over multiple periods as the exchange rate fluctuates.
The document discusses financing as a marketing tool for exports. It covers various financing options for export orders like letters of credit, advances, and factoring. It also describes the roles of institutions that provide export financing like commercial banks, the Reserve Bank of India, Export-Import Bank of India, and discusses facilities like pre-shipment financing, post-shipment financing, and project financing. Islamic banking methods for export financing using concepts like Musharakah and Murabahah are also summarized.
International foreign exchange transactions involve two steps: 1) purchasing foreign currency and 2) using that foreign currency to purchase goods or services abroad. Foreign exchange refers to foreign currencies and the exchange of one currency for another. The foreign exchange market exists globally to facilitate international trade and investment needs, trading over $1.5 trillion daily between central banks, corporations, banks, and individuals.
This document provides an overview of currency derivatives, including forward contracts, futures contracts, and options contracts. It explains how these instruments work and how they can be used by multinational corporations and speculators to hedge currency risk or speculate on anticipated exchange rate movements. Forward contracts lock in an exchange rate for a future date, while futures contracts standardize the amount and settlement date. Options contracts provide the right but not obligation to buy or sell a currency at a set price. These derivatives allow risk from currency fluctuations to be transferred between parties.
This chapter discusses how currency derivatives like forward contracts, futures, and options are used for hedging and speculation based on anticipated exchange rate movements. Forward contracts allow corporations to lock in exchange rates for future currency needs. Currency futures contracts are standardized and traded on exchanges, while options provide the right but not obligation to buy or sell a currency. Both futures and options allow hedging of currency risk and speculation based on exchange rate expectations. The use of these derivatives can increase the value of a multinational corporation by reducing exposure to fluctuating exchange rates.
Forfaiting is a form of financing international trade receivables through the discounting of trade bills and promissory notes without recourse to the exporter. It involves a forfaiter purchasing the receivables from the exporter at a discount, taking on the full risk of non-payment. The process begins with a commercial contract between an exporter and importer, where the importer draws bank-guaranteed promissory notes payable to the exporter. The exporter then enters an agreement to sell the notes to a forfaiter at a discount, receiving immediate payment, and the forfaiter collects payment at maturity from the importer's bank. Forfaiting provides 100% financing to exporters and eliminates risks
This document provides definitions and explanations of key terms related to international financial management and foreign exchange. It contains questions and answers on topics such as: invisibles in the balance of payments; the law of one price; foreign exchange risk; forward rates; currency futures contracts; functional currency and reporting currency; covered interest rate arbitrage; marking to market; purchasing power parity; direct and indirect currency quotations; clean and dirty floats; participants in the foreign exchange market; translation exposure; syndicated loans; absolute and relative purchasing power parity; the structure of the current account; authorized dealers; bid and offer rates; short positions; country risk; economic exposure; hedging versus speculative motives; the balance of payments; and distinguishing between
Foreign exchange risk and exposure refer to how changes in exchange rates can affect the value of a firm's assets, liabilities, and profits. Exposure is the sensitivity of a firm's value to exchange rate changes, while risk is the variability of a firm's value due to uncertain exchange rate changes. There are three main types of exposures - transaction, translation, and economic. Firms can use hedging strategies like forward contracts and options to manage their foreign exchange risk and exposure by locking in exchange rates for future transactions.
This document discusses various methods for managing foreign exchange risk exposure, including transaction exposure and economic exposure. It defines transaction exposure as the uncertain value of known foreign currency cash flows, and economic exposure as the uncertain value of uncertain foreign currency cash flows. The document also discusses hedging techniques for transaction exposure, such as futures contracts, forwards, money market hedges and options. Long-term hedging techniques include long-term forwards, currency swaps and parallel loans.
This document provides information on various sources and forms of export financing in India. Commercial banks provide pre-shipment financing to exporters at concessional rates, which is then refinanced by institutions like the Reserve Bank of India and Export Import Bank of India. Pre-shipment financing helps exporters with costs before shipping goods overseas. Post-shipment financing is provided against evidence of shipment and helps export exporters between shipment and receiving payment. Other forms discussed include forfaiting, which transfers risk to a third party, and factoring, where a factor provides financing and manages receivables. Related institutions like RBI, ECGC, and DGFT also support export policies and programs.
Forfeiting is the process of purchasing a company's export receivables at a discount for cash. It involves an exporter selling its receivables from export sales to a forfeiting company, which then receives payment from the importer. This converts deferred export payments into immediate cash for the exporter, while absorbing the risks normally borne by exporters such as political and currency risk. Forfeiting provides exporters with liquidity and freedoms them from credit administration and risk, while absorbing the importer's risk for the forfeiting company in exchange for a discount on the receivables.
The document discusses various foreign exchange instruments:
1. It describes foreign currency term loans and foreign currency leverage loans that allow companies to free up money tied in long-term assets or leverage investment products.
2. It explains that bonds provide fixed interest rates over long terms, which aids in budgeting, and ensures loans can be retired without refinancing.
3. It provides details on commercial paper, which is a short-term promissory note that large companies issue to raise cash, and American Depositary Receipts (ADRs), which allow non-US companies to have their stock traded on American markets.
This document provides information about Axis Bank's six-week vocational training program in their Forex department. It discusses the functions of Axis Bank's Forex department in Ludhiana, including money transfers, issuing demand drafts and cheques, and performing spot contracts, forward contracts, currency options, and other forex services. Organizational charts and SWOT analyses of the department are also presented. Export financing options like pre-shipment financing, post-shipment financing, and other concepts are defined in brief.
This document provides an overview of key concepts in bank financial management and international banking. It discusses topics like exchange rates, foreign exchange markets, factors that influence exchange rates, different types of exchange rates like spot and forward rates, currency quotes, cross currency rates, and risks involved in foreign exchange operations like exchange risk, credit risk, and operational risk. It also outlines the roles of the forex dealer, back office, and mid office in managing foreign exchange transactions and risks.
The document provides an introduction to accounting standards for financial instruments including MFRS 139, MFRS 132 and MFRS 7. It discusses key concepts such as recognition and measurement of financial assets and liabilities, classification and subsequent measurement of financial assets, and derecognition of financial assets and liabilities. The document also provides an overview of hedge accounting, describing the three types of hedges (fair value hedge, cash flow hedge and hedge of a net investment) and hedge accounting requirements. Examples are provided to illustrate journal entries for fair value hedge and cash flow hedge.
This document provides an overview of bank financial management and international banking topics related to the CAIIB exam syllabus. It covers key concepts like exchange rates, foreign exchange markets, spot and forward rates, currency quotes, cross-currency rates, arbitrage, forex operations including dealing, back office and mid office functions, and associated risks. It also discusses forex derivatives like forwards, options, swaps, and defines risks in forex operations such as exchange rate risk, settlement risk, and how banks manage risks through various dealing limits.
Factoring and forfaiting are both forms of invoice financing for businesses. Factoring involves the purchase of accounts receivable by a factoring company, which then takes on the responsibility of collecting payments from customers. It is usually used for domestic and export receivables with credit periods under 180 days. Forfaiting specifically refers to the forfeiting of rights to future export receivables in exchange for an upfront discounted payment. It is used for longer term export receivables over 180 days and provides financing without recourse for the exporter. The key differences between the two are the parties involved, eligible receivables and credit periods, and level of services provided.
This document provides an overview of international trade finance. It begins with defining international trade and outlining its importance. It then discusses key aspects of international trade finance such as foreign exchange activities, the process of a typical trade transaction, import and export finance options, international payment methods, trade products/services, sources of import finance, and relevant guidelines, regulations and practices. The objectives are to enhance customer service and discuss the overall structure of international trade.
This document discusses export financing options available to exporters in India. It describes pre-shipment financing, which provides working capital to purchase raw materials, process goods, and prepare for export. Post-shipment financing is also described, which provides credit after goods have been shipped until payment is received. Specific financing products like packing credit, clean packing credit, and running account facilities are explained. Requirements, periods of advance, and liquidation of pre-shipment credit are outlined. Financing of service exports is also briefly covered.
This document discusses foreign currency exposure and risk management for multinational companies. It defines transaction exposure as the risk from adverse currency movements between when a transaction is budgeted and when the exposure is extinguished. Transaction exposure is short-term and impacts cash flow. The document discusses various hedging instruments for transaction exposure like forward contracts, futures contracts, options, and money market hedges. It provides examples of how companies can use these instruments to hedge currency risk from imports and exports.
* Jawad bought a call option on British pound with a strike price of $1.4870
* He paid a premium of $0.0143 per unit
* Before expiration, the spot rate reached $1.4995
* Since the spot rate is higher than the strike price, Jawad exercises the option
* By exercising, Jawad buys pounds at the strike price of $1.4870
* He immediately sells the pounds at the spot rate of $1.4995
* So his profit per unit is $1.4995 - $1.4870 = $0.0125
* After deducting the premium of $0.0143 paid earlier, Jawad's net
This document summarizes various international financial market instruments used to raise funds, including equities, bonds, and short-term instruments. International equities, also called Euro-equities, are foreign portfolio equity investments that provide dividends but no voting rights. International bonds include foreign bonds denominated in the currency of the foreign country and Eurobonds denominated in a non-domestic currency. Short-term instruments include Euro notes, Euro commercial papers, and medium-term Euro notes that provide short-term funding over periods of 3 months to 7 years. These various instruments provide benefits to both issuers and investors in accessing international capital markets.
Vietnam Accounting Standards - VAS 10 Effects of changes in foreign exchange ...AC&C Consulting Co., Ltd.
1) This document outlines accounting standards for foreign currency transactions and the conversion of financial statements for overseas activities. It addresses the initial recognition, reporting, and recognition of exchange rate differences for foreign currency transactions, as well as the conversion of financial statements for overseas subsidiaries and branches.
2) Exchange rate differences arising from an enterprise's net investment in foreign subsidiaries are classified as owners' equity until the investment is liquidated. Monetary items relating to long-term receivables or loans from foreign subsidiaries, which do not have a defined settlement date, are also considered part of the net investment.
3) Exchange rate differences from foreign currency liabilities that hedge risks of a net investment in a foreign subsidiary are also
With our professionals on your side, you do not need to worry about how you are going to get accounting assignment help, and no matter what you need, our professionals can provide! Log on to http://www.helpwithassignment.com/accounting-assignment-help
Translation of Foreign Currency in Financial Statements An.docxturveycharlyn
Translation of Foreign Currency in Financial Statements
And
Preparation of Journal Entries
This week’s focus is on the translation of foreign currency financial statements for the purpose of
preparing consolidated financials and also posting journal entries.
When preparing consolidated financial statements on a worldwide basis, the foreign currency financial
statements prepared by foreign operations must be translated into the parent company’s reporting
currency.
Issues related to this translation:
1. Which method should be used, and
2. Where should the resulting translation adjustment be reported in the consolidated financial
statements.
Translation methods differ on the basis of which accounts are translated at the current exchange rate
and which are translated at historical rates. Accounts translated at the current exchange rate are
exposed to translation adjustment (balance sheet exposure).
Different translation methods give rise to different concepts of balance sheet exposure and translation
adjustments of differing sign and magnitude.
There are four major methods of translating foreign currency financial statements:
1. current/noncurrent method
2. monetary/non-monetary method
3. temporal method
4. current rate
We will be focusing on the temporal and current rate methods.
CURRENT RATE METHOD
All assets and liabilities are translated at the current exchange rate giving rise to a balance sheet
exposure equal to the foreign subsidiary’s net assets. Stockholders’ equity accounts are translated at
historical exchange rates. Income statement items are translated at the average exchange rate for the
current period.
Appreciation of the foreign currency results in a positive translation adjustment
Depreciation of the foreign currency results in a negative translation adjustment
Translating all assets and liabilities at the current exchange rate maintains the relationships that exist in
the foreign currency financial statements.
Translating assets carried at historical cost at the current exchange rate results in amounts being
reported on the parent’s consolidated balance sheet that have no economic meaning.
TEMPORAL METHOD
A method of foreign currency translation that uses exchange rates based on the time assets and
liabilities are acquired or incurred. The exchange rate used also depends on the method of valuation
that is used. Assets and liabilities valued at current costs use the current exchange rate and those that
use historical exchange rates are valued at historical costs. Source: INVESTOPEDIA
With the temporal method assets are carried at current or future value (cash, marketable securities,
receivables) and liabilities are re-measured at the current exchange rate.
Assets carried at historical cost and stockholders’ equity accounts are re-measured at historical
exchange rates.
Expenses related to assets re ...
This document provides an overview of currency derivatives, including forward contracts, futures contracts, and options contracts. It explains how these instruments work and how they can be used by multinational corporations and speculators to hedge currency risk or speculate on anticipated exchange rate movements. Forward contracts lock in an exchange rate for a future date, while futures contracts standardize the amount and settlement date. Options contracts provide the right but not obligation to buy or sell a currency at a set price. These derivatives allow risk from currency fluctuations to be transferred between parties.
This chapter discusses how currency derivatives like forward contracts, futures, and options are used for hedging and speculation based on anticipated exchange rate movements. Forward contracts allow corporations to lock in exchange rates for future currency needs. Currency futures contracts are standardized and traded on exchanges, while options provide the right but not obligation to buy or sell a currency. Both futures and options allow hedging of currency risk and speculation based on exchange rate expectations. The use of these derivatives can increase the value of a multinational corporation by reducing exposure to fluctuating exchange rates.
Forfaiting is a form of financing international trade receivables through the discounting of trade bills and promissory notes without recourse to the exporter. It involves a forfaiter purchasing the receivables from the exporter at a discount, taking on the full risk of non-payment. The process begins with a commercial contract between an exporter and importer, where the importer draws bank-guaranteed promissory notes payable to the exporter. The exporter then enters an agreement to sell the notes to a forfaiter at a discount, receiving immediate payment, and the forfaiter collects payment at maturity from the importer's bank. Forfaiting provides 100% financing to exporters and eliminates risks
This document provides definitions and explanations of key terms related to international financial management and foreign exchange. It contains questions and answers on topics such as: invisibles in the balance of payments; the law of one price; foreign exchange risk; forward rates; currency futures contracts; functional currency and reporting currency; covered interest rate arbitrage; marking to market; purchasing power parity; direct and indirect currency quotations; clean and dirty floats; participants in the foreign exchange market; translation exposure; syndicated loans; absolute and relative purchasing power parity; the structure of the current account; authorized dealers; bid and offer rates; short positions; country risk; economic exposure; hedging versus speculative motives; the balance of payments; and distinguishing between
Foreign exchange risk and exposure refer to how changes in exchange rates can affect the value of a firm's assets, liabilities, and profits. Exposure is the sensitivity of a firm's value to exchange rate changes, while risk is the variability of a firm's value due to uncertain exchange rate changes. There are three main types of exposures - transaction, translation, and economic. Firms can use hedging strategies like forward contracts and options to manage their foreign exchange risk and exposure by locking in exchange rates for future transactions.
This document discusses various methods for managing foreign exchange risk exposure, including transaction exposure and economic exposure. It defines transaction exposure as the uncertain value of known foreign currency cash flows, and economic exposure as the uncertain value of uncertain foreign currency cash flows. The document also discusses hedging techniques for transaction exposure, such as futures contracts, forwards, money market hedges and options. Long-term hedging techniques include long-term forwards, currency swaps and parallel loans.
This document provides information on various sources and forms of export financing in India. Commercial banks provide pre-shipment financing to exporters at concessional rates, which is then refinanced by institutions like the Reserve Bank of India and Export Import Bank of India. Pre-shipment financing helps exporters with costs before shipping goods overseas. Post-shipment financing is provided against evidence of shipment and helps export exporters between shipment and receiving payment. Other forms discussed include forfaiting, which transfers risk to a third party, and factoring, where a factor provides financing and manages receivables. Related institutions like RBI, ECGC, and DGFT also support export policies and programs.
Forfeiting is the process of purchasing a company's export receivables at a discount for cash. It involves an exporter selling its receivables from export sales to a forfeiting company, which then receives payment from the importer. This converts deferred export payments into immediate cash for the exporter, while absorbing the risks normally borne by exporters such as political and currency risk. Forfeiting provides exporters with liquidity and freedoms them from credit administration and risk, while absorbing the importer's risk for the forfeiting company in exchange for a discount on the receivables.
The document discusses various foreign exchange instruments:
1. It describes foreign currency term loans and foreign currency leverage loans that allow companies to free up money tied in long-term assets or leverage investment products.
2. It explains that bonds provide fixed interest rates over long terms, which aids in budgeting, and ensures loans can be retired without refinancing.
3. It provides details on commercial paper, which is a short-term promissory note that large companies issue to raise cash, and American Depositary Receipts (ADRs), which allow non-US companies to have their stock traded on American markets.
This document provides information about Axis Bank's six-week vocational training program in their Forex department. It discusses the functions of Axis Bank's Forex department in Ludhiana, including money transfers, issuing demand drafts and cheques, and performing spot contracts, forward contracts, currency options, and other forex services. Organizational charts and SWOT analyses of the department are also presented. Export financing options like pre-shipment financing, post-shipment financing, and other concepts are defined in brief.
This document provides an overview of key concepts in bank financial management and international banking. It discusses topics like exchange rates, foreign exchange markets, factors that influence exchange rates, different types of exchange rates like spot and forward rates, currency quotes, cross currency rates, and risks involved in foreign exchange operations like exchange risk, credit risk, and operational risk. It also outlines the roles of the forex dealer, back office, and mid office in managing foreign exchange transactions and risks.
The document provides an introduction to accounting standards for financial instruments including MFRS 139, MFRS 132 and MFRS 7. It discusses key concepts such as recognition and measurement of financial assets and liabilities, classification and subsequent measurement of financial assets, and derecognition of financial assets and liabilities. The document also provides an overview of hedge accounting, describing the three types of hedges (fair value hedge, cash flow hedge and hedge of a net investment) and hedge accounting requirements. Examples are provided to illustrate journal entries for fair value hedge and cash flow hedge.
This document provides an overview of bank financial management and international banking topics related to the CAIIB exam syllabus. It covers key concepts like exchange rates, foreign exchange markets, spot and forward rates, currency quotes, cross-currency rates, arbitrage, forex operations including dealing, back office and mid office functions, and associated risks. It also discusses forex derivatives like forwards, options, swaps, and defines risks in forex operations such as exchange rate risk, settlement risk, and how banks manage risks through various dealing limits.
Factoring and forfaiting are both forms of invoice financing for businesses. Factoring involves the purchase of accounts receivable by a factoring company, which then takes on the responsibility of collecting payments from customers. It is usually used for domestic and export receivables with credit periods under 180 days. Forfaiting specifically refers to the forfeiting of rights to future export receivables in exchange for an upfront discounted payment. It is used for longer term export receivables over 180 days and provides financing without recourse for the exporter. The key differences between the two are the parties involved, eligible receivables and credit periods, and level of services provided.
This document provides an overview of international trade finance. It begins with defining international trade and outlining its importance. It then discusses key aspects of international trade finance such as foreign exchange activities, the process of a typical trade transaction, import and export finance options, international payment methods, trade products/services, sources of import finance, and relevant guidelines, regulations and practices. The objectives are to enhance customer service and discuss the overall structure of international trade.
This document discusses export financing options available to exporters in India. It describes pre-shipment financing, which provides working capital to purchase raw materials, process goods, and prepare for export. Post-shipment financing is also described, which provides credit after goods have been shipped until payment is received. Specific financing products like packing credit, clean packing credit, and running account facilities are explained. Requirements, periods of advance, and liquidation of pre-shipment credit are outlined. Financing of service exports is also briefly covered.
This document discusses foreign currency exposure and risk management for multinational companies. It defines transaction exposure as the risk from adverse currency movements between when a transaction is budgeted and when the exposure is extinguished. Transaction exposure is short-term and impacts cash flow. The document discusses various hedging instruments for transaction exposure like forward contracts, futures contracts, options, and money market hedges. It provides examples of how companies can use these instruments to hedge currency risk from imports and exports.
* Jawad bought a call option on British pound with a strike price of $1.4870
* He paid a premium of $0.0143 per unit
* Before expiration, the spot rate reached $1.4995
* Since the spot rate is higher than the strike price, Jawad exercises the option
* By exercising, Jawad buys pounds at the strike price of $1.4870
* He immediately sells the pounds at the spot rate of $1.4995
* So his profit per unit is $1.4995 - $1.4870 = $0.0125
* After deducting the premium of $0.0143 paid earlier, Jawad's net
This document summarizes various international financial market instruments used to raise funds, including equities, bonds, and short-term instruments. International equities, also called Euro-equities, are foreign portfolio equity investments that provide dividends but no voting rights. International bonds include foreign bonds denominated in the currency of the foreign country and Eurobonds denominated in a non-domestic currency. Short-term instruments include Euro notes, Euro commercial papers, and medium-term Euro notes that provide short-term funding over periods of 3 months to 7 years. These various instruments provide benefits to both issuers and investors in accessing international capital markets.
Vietnam Accounting Standards - VAS 10 Effects of changes in foreign exchange ...AC&C Consulting Co., Ltd.
1) This document outlines accounting standards for foreign currency transactions and the conversion of financial statements for overseas activities. It addresses the initial recognition, reporting, and recognition of exchange rate differences for foreign currency transactions, as well as the conversion of financial statements for overseas subsidiaries and branches.
2) Exchange rate differences arising from an enterprise's net investment in foreign subsidiaries are classified as owners' equity until the investment is liquidated. Monetary items relating to long-term receivables or loans from foreign subsidiaries, which do not have a defined settlement date, are also considered part of the net investment.
3) Exchange rate differences from foreign currency liabilities that hedge risks of a net investment in a foreign subsidiary are also
With our professionals on your side, you do not need to worry about how you are going to get accounting assignment help, and no matter what you need, our professionals can provide! Log on to http://www.helpwithassignment.com/accounting-assignment-help
Translation of Foreign Currency in Financial Statements An.docxturveycharlyn
Translation of Foreign Currency in Financial Statements
And
Preparation of Journal Entries
This week’s focus is on the translation of foreign currency financial statements for the purpose of
preparing consolidated financials and also posting journal entries.
When preparing consolidated financial statements on a worldwide basis, the foreign currency financial
statements prepared by foreign operations must be translated into the parent company’s reporting
currency.
Issues related to this translation:
1. Which method should be used, and
2. Where should the resulting translation adjustment be reported in the consolidated financial
statements.
Translation methods differ on the basis of which accounts are translated at the current exchange rate
and which are translated at historical rates. Accounts translated at the current exchange rate are
exposed to translation adjustment (balance sheet exposure).
Different translation methods give rise to different concepts of balance sheet exposure and translation
adjustments of differing sign and magnitude.
There are four major methods of translating foreign currency financial statements:
1. current/noncurrent method
2. monetary/non-monetary method
3. temporal method
4. current rate
We will be focusing on the temporal and current rate methods.
CURRENT RATE METHOD
All assets and liabilities are translated at the current exchange rate giving rise to a balance sheet
exposure equal to the foreign subsidiary’s net assets. Stockholders’ equity accounts are translated at
historical exchange rates. Income statement items are translated at the average exchange rate for the
current period.
Appreciation of the foreign currency results in a positive translation adjustment
Depreciation of the foreign currency results in a negative translation adjustment
Translating all assets and liabilities at the current exchange rate maintains the relationships that exist in
the foreign currency financial statements.
Translating assets carried at historical cost at the current exchange rate results in amounts being
reported on the parent’s consolidated balance sheet that have no economic meaning.
TEMPORAL METHOD
A method of foreign currency translation that uses exchange rates based on the time assets and
liabilities are acquired or incurred. The exchange rate used also depends on the method of valuation
that is used. Assets and liabilities valued at current costs use the current exchange rate and those that
use historical exchange rates are valued at historical costs. Source: INVESTOPEDIA
With the temporal method assets are carried at current or future value (cash, marketable securities,
receivables) and liabilities are re-measured at the current exchange rate.
Assets carried at historical cost and stockholders’ equity accounts are re-measured at historical
exchange rates.
Expenses related to assets re ...
Solution Manual Advanced Accounting 9th Edition by Baker Chapter 12Saskia Ahmad
The document discusses issues related to multinational accounting and the translation of foreign entity financial statements. It provides answers to multiple questions covering topics such as the benefits of adopting international accounting standards, the structure and mission of the International Accounting Standards Board, the process for developing global standards, and methods for translating foreign entity financial statements into the parent company's reporting currency. Specifically, it addresses how to determine a foreign entity's functional currency, the difference between translation and remeasurement methods, how translation adjustments are recorded, and issues around consolidating foreign subsidiaries.
The document discusses issues related to multinational accounting and the translation of foreign entity financial statements. It provides answers to multiple questions covering topics such as the benefits of adopting international financial reporting standards (IFRS), the structure and process of the International Accounting Standards Board (IASB), considerations around US adoption of IFRS, foreign currency translation methods, and the determination of a foreign entity's functional currency.
CHAPTER 11 Translation Exposure
What gets measured gets managed.
—Anonymous
LEARNING OBJECTIVES
■Examine how the process of consolidation of a multinational firm’s financial results creates translation exposure
■Illustrate both the theoretical and practical differences between the two primary methods of translating or remeasuring foreign currency-denominated financial statements
■Understand how translation can potentially alter the value of a multinational firm
■Explore the costs, benefits, and effectiveness of managing translation exposure
Translation exposure, the second category of accounting exposures, arises because financial statements of foreign subsidiaries—which are stated in foreign currency—must be restated in the parent’s reporting currency so that the firm can prepare consolidated financial statements. Foreign subsidiaries of U.S. companies, for example, must restate foreign currency-denominated financial statements into U.S. dollars so that the foreign values can be added to the parent’s U.S. dollar-denominated balance sheet and income statement. Using our example U.S. firm, Ganado, this is shown conceptually in Exhibit 11.1. This accounting process is called translation. Translation exposure is the potential for an increase or decrease in the parent’s net worth and reported net income that is caused by a change in exchange rates since the last translation.
Although the main purpose of translation is to prepare consolidated financial statements, translated statements are also used by management to assess the performance of foreign subsidiaries. While such assessment by management might be performed using the local currency statements, restatement of all subsidiary statements into the single “common denominator” of one currency facilitates management comparison. This chapter reviews the predominate methods used in translation today, and concludes with the Mini-Case, McDonald’s, Hoover Hedges, and Cross-Currency Swaps, illustrating how one major multinational manages its investment and translation risks.
EXHIBIT 11.1 Ganado’s Cross-Border Investments and Consolidation
Overview of Translation
There are two financial statements for each subsidiary that must be translated for consolidation: the income statement and the balance sheet. Statements of cash flow are not translated from the foreign subsidiaries. The consolidated statement of cash flow is constructed from the consolidated statement of income and consolidated balance sheet. Because the consolidated results for any multinational firm are constructed from all of its subsidiary operations, including foreign subsidiaries, the possibility of a change in consolidated net income or consolidated net worth from period to period, as a result of a change in exchange rates, is high.
For any individual financial statement, internally, if the same exchange rate were used to remeasure each and every line item on the individual statement—the income statement and balance sheet—there would b ...
This document discusses foreign exchange risk and strategies for reducing exposure for international businesses. It covers:
1) Foreign exchange risk arises when business operations occur between countries with different currencies. Exchange rate fluctuations can impact financial results. Sellers prefer lower exchange rates while buyers prefer higher rates.
2) Most international transactions use strong reference currencies like USD, EUR, GBP, JPY due to stability. Exchange rates are set by supply/demand in markets and factors like inflation, interest rates, economic performance.
3) Some countries use restrictions to control currency value and limit currency conversion to prevent capital flight or maintain artificial values. Reduction of exposure involves leading/lagging payments, financial tools like forwards/options, and
This document discusses foreign exchange risk and its management. It begins by defining foreign exchange risk as the exposure of an institution to movements in foreign exchange rates. There are three main types of foreign exchange risk: translation exposure, transaction exposure, and economic exposure. The document then discusses various techniques for managing foreign exchange risk, including matching currency cash flows, currency swaps, forward exchange rate contracts, currency options, and more. The overall purpose is to outline the key risks and approaches taken to minimize the negative impacts of currency variations on companies' financial performance.
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Accounting for foregn curency 6-1 (2).pptxRobsanAfdal
IAS 21 addresses the accounting and reporting effects of changes in foreign exchange rates. It prescribes how to include foreign currency transactions and foreign operations in financial statements, and how to translate financial statements into the presentation currency. Exchange differences arising from foreign currency transactions and translations are generally recognized in profit or loss. However, some differences may be recognized in other comprehensive income. The functional currency is determined based on the primary economic environment the entity operates in, considering factors like the currency of sales prices and costs.
This chapter discusses accounting issues related to foreign currency transactions and financial instruments for multinational companies. It covers how to record and report transactions involving foreign currencies, the different types of exchange rates used to translate balances, and how to account for imports/exports and hedging strategies using financial instruments. The key aspects are translating foreign currency transactions and balances to the reporting currency, managing foreign currency risk, and designating hedges as either fair value, cash flow, or net investment hedges for accounting purposes.
Société Générale is a French multinational banking and financial services company split into three main divisions: retail banking, corporate and investment banking, and global investment management. It has a presence in over 40 countries and offers a variety of banking services including corporate finance, trade finance, treasury products, and investment banking. Société Générale uses swaps to hedge risks and speculate on price changes by exchanging cash flows from different financial instruments, with the most common type being interest rate swaps that exchange fixed and floating rate loan payments.
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HPGD JA22 0245 - Instruments in foreign trade.pptxamitarvindparab
The document discusses various instruments used in foreign trade, including letters of credit, bills of exchange, documentary collections, open accounts, export credit insurance, forfeiting, factoring, and methods of settlement between banks for foreign exchange transactions. It provides details on each instrument, describing their purpose and processes. It also discusses some challenges and limitations of foreign trade.
1. The document discusses various export initiatives and targets in India including adding new focus markets, duty incentives, and increasing annual export growth targets.
2. It also covers important elements of executing export orders properly such as agreeing on terms, product details, payment and delivery terms, and establishing a confirmed order in writing.
3. Key considerations for working capital management in exports are discussed such as managing receivables, inventory, costs of funds, discounts, and the role of ECGC export credit insurance.
1) Exchange exposure refers to the extent to which transactions, assets, and liabilities of a company are denominated in currencies other than the company's reporting currency. Transaction exposure poses more risk than translation exposure and must be carefully analyzed.
2) When importing or exporting between countries, the fluctuation in currency values presents problems. Companies must forecast currency market movements and gain insight into exchange rates to maximize the value of international transactions.
3) Risks like value at risk, forecasting errors, and gaps in exposure management systems must be considered. Companies set benchmarks like managing exposures over 6 months to help mitigate these risks. Hedging strategies using tools like forwards contracts and currency swaps are implemented to meet the benchmarks.
1. Exchange exposure refers to the extent to which transactions, assets, and liabilities of a company are denominated in currencies other than the company's reporting currency. Transaction exposure poses more risk than translation exposure and must be carefully analyzed.
2. When dealing in international trade, companies face uncertainty regarding currency fluctuations between the exporting and importing nations. They must forecast currency market movements and implement hedging strategies to maximize profits.
3. Risks like value at risk, forecasting errors, and gaps in exposure management systems must be assessed. Companies set benchmarks like managing exposures on a six month period to help evaluate performance and risks.
Unit-1 discusses various payment instruments used in international trade such as wire transfers, foreign checks, commercial letters of credit, and documentary collections. It explains the features, advantages, and disadvantages of each payment method. Unit-2 defines foreign exchange rates and discusses methods of quoting exchange rates such as direct and indirect quotation. It also defines terms like pip, spread rate, official rate, cross rate, and forward rate as they relate to foreign exchange.
This document outlines accounting standards for foreign exchange rates. It discusses how to account for transactions in foreign currencies and translating financial statements of foreign operations. For transactions, the exchange rate on the transaction date is used. Monetary items in financial statements are translated at the closing rate, while non-monetary items are translated at historical rates. Exchange differences are generally recognized as income/expenses, except for differences related to net investments in non-integral foreign operations, which are accumulated in a foreign currency translation reserve until disposal of the net investment. Financial statements of integral foreign operations are translated as if their transactions were the reporting entity's, while non-integral operations use closing rates for assets/liabilities and transaction date rates for income/ex
This document provides answers and explanations regarding multinational accounting concepts related to foreign currency transactions and financial instruments. It defines direct and indirect exchange rates, explains how to calculate them, and discusses how economic factors can impact currency exchange rates. The document also summarizes accounting standards for foreign currency transactions and hedging activities, how to recognize related gains and losses, and examples of balance sheet and income statement entries for various foreign currency situations.
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Economic Risk Factor Update: June 2024 [SlideShare]Commonwealth
May’s reports showed signs of continued economic growth, said Sam Millette, director, fixed income, in his latest Economic Risk Factor Update.
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Discover essential details about Thailand's recent visa policy changes, tailored for tourists and students. Amit Kakkar Easy Visa provides a comprehensive overview of new requirements, application processes, and tips to ensure a smooth transition for all travelers.
Abhay Bhutada, the Managing Director of Poonawalla Fincorp Limited, is an accomplished leader with over 15 years of experience in commercial and retail lending. A Qualified Chartered Accountant, he has been pivotal in leveraging technology to enhance financial services. Starting his career at Bank of India, he later founded TAB Capital Limited and co-founded Poonawalla Finance Private Limited, emphasizing digital lending. Under his leadership, Poonawalla Fincorp achieved a 'AAA' credit rating, integrating acquisitions and emphasizing corporate governance. Actively involved in industry forums and CSR initiatives, Abhay has been recognized with awards like "Young Entrepreneur of India 2017" and "40 under 40 Most Influential Leader for 2020-21." Personally, he values mindfulness, enjoys gardening, yoga, and sees every day as an opportunity for growth and improvement.
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This presentation explores the pivotal role of KYC compliance in shaping and enforcing global regulations within the dynamic landscape of cryptocurrencies. Dive into the intricate connection between KYC practices and the evolving legal frameworks governing the crypto industry.
OJP data from firms like Vicinity Jobs have emerged as a complement to traditional sources of labour demand data, such as the Job Vacancy and Wages Survey (JVWS). Ibrahim Abuallail, PhD Candidate, University of Ottawa, presented research relating to bias in OJPs and a proposed approach to effectively adjust OJP data to complement existing official data (such as from the JVWS) and improve the measurement of labour demand.
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Cryptocurrency is digital money that operates independently of a central authority, utilizing cryptography for security. Unlike traditional currencies issued by governments (fiat currencies), cryptocurrencies are decentralized and typically operate on a technology called blockchain. Each cryptocurrency transaction is recorded on a public ledger, ensuring transparency and security.
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ILC's Retirement Income Summit was hosted by M&G and supported by Canada Life. The event brought together key policymakers, influencers and experts to help identify policy priorities for the next Government and ensure more of us have access to a decent income in retirement.
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Jo Blanden, Professor in Economics, University of Surrey
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Molly Broome, Economist, Resolution Foundation
Nida Broughton, Co-Director of Economic Policy, Behavioural Insights Team
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Sue Lewis, ILC Trustee
Siobhan Lough, Senior Consultant, Hymans Robertson
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Daniela Silcock, Head of Policy Research, Pensions Policy Institute
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Jordi Skilbeck, Senior Policy Advisor, Pensions and Lifetime Savings Association
Rt Hon Sir Stephen Timms, former Chair, Work & Pensions Committee
Nigel Waterson, ILC Trustee
Jackie Wells, Strategy and Policy Consultant, ILC Strategic Advisory Board
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C Users Eddie Desktop Fin643 Shuang
1. A2. (1) Difference between the “current rate” translation method and the temporal method:
Most countries today specify the translation method used by a foreign subsidiary based on the
subsidiary’s business operations. A foreign subsidiary’s business can be categorized as either an
integrated foreign entity or a self-sustaining foreign entity. For international standard, if foreign
operation is integral to parent operations, use temporal method, and exchange gains and losses are
income; If foreign operation is self-sustaining, use current rate method and exchange differences
are equity until disposal.
The main differences between current date method and the temporal method are:
(a) The current rate method.
• Translate assets and liabilities using the current rate.
• Translate revenues and expenses at the average rate
• Translate equity and dividends at historical rate.
• Calculate ending retained earnings and place in balance sheet.
• Determine the translation adjustment in equity necessary to “balance” the balance sheet.
(b) Temporal Method:
• Translate cash, receivables, and liabilities at current rate
• Translate inventory / CoGS, fixed assets / depreciation, and equity / dividends at historical
rate
• Translate revenues and other expenses at average rate
• Calculate ending retained earnings and place in balance sheet.
• Determine the remeasurement gain or loss in the income statement that will make retained
earnings the amount that “balances” the balance sheet.
However, the US differentiates foreign subsidiaries on the basis of functional currency, not
subsidiary characterization.
• If the financial statements of the foreign subsidiary are maintained in US dollars, translation
is not required.
• If the statements are maintained in the local currency, and the local currency is the functional
currency, they are translated by the current rate method.
• If the statements are maintained in local currency, and the US dollar is the functional
currency, they are remeasured by the temporal method.
• If the statements are in local currency and neither the local currency nor the US dollar is the
functional currency, the statements must first be remeasured into the functional currency by
the temporal method, and then translated into US dollars by the current rate method.
(2) For subsidiaries operating in low inflation countries, FAS #52 uses the current rate method as
the basic translation rule. At the same time it mitigates the consequences by allowing companies
to move translation losses directly to a special subaccount in the net worth section of the balance
sheet, instead of adjusting current income. Solving the true profitability often disguised by
exchange rate volatility under FAS#8. FAS#8 uses temporal method and report translation gains
or loses on income statement. As a result, the net income is greatly affected by exchange rate
volatility.
A more significant innovation of FAS #52 is the quot;functionalquot; currency concept, which gives a
company the opportunity to identify the primary economic environment and select the
appropriate (functional) currency for each of the corporation's foreign entities. In essence, FAS 52
allows management much more flexibility to present the impact of exchange rate variations in
accordance with perceived economic reality; by the same token, it provides greater scope for
manipulation of reported earnings and it reduces comparability of financial data for different
firms.
However, FAS#52 has a special provision for translating statements of foreign subsidiaries of
U.S. companies operating in countries where cumulative inflation has been approximately 100%
or more over a three-year period. Financial statement of these subsidiaries must be translated into
the reporting currency using the temporal method which is like under FAS#8.
2. A3.
Operating exposure, also called economic exposure, competitive exposure, or strategic exposure,
measures any changes in present values of a firm resulting from changes in future operating cash
flows caused by any unexpected change in exchange rates.
Operating exposures can be partially managed by adopting operating or financing policies that
offset anticipated foreign exchange exposures. Six of the most commonly employed proactive
policies are: Matching currency cash flows; Risk-sharing agreements; Back-to-back or parallel
loans; Currency swaps; Leads and lags; Reinvoicing center.
Numerical example: using a Cross-Currency Swap to hedge currency exposure
Two companies in different countries; Japanese corporation and United States corporation. They
want to hedge their revenues due to the change in exchange rates between Japanese yen and US
dollars. Assume that now exchange rate between two currencies is 100 ¥ /1 $ and exchange
become 90¥ /1$ one year later. Both the Japanese corporation and the US corporation would like
to enter into cross- currency swap that would allow them to use foreign currency cash flows to
service debt. Japanese corporation sale its products in US. They get US dollar for its revenues,
but base on the assumption that dollar become weaker after one year period Japanese
corporation want to hedge if the situation happens. For example the sales for Japanese
corporation in US are 10 million they want swap with one US corporation which also worry
about the devaluation of yen. Dealer will make money for some percentage The Japanese
corporation pay dollar to dealer and receive yen given by the US corporation. Whatever the
exchange rate is what after one year. Dealer can control the amount and timing of the desired
swap. They make agreement that dealer will get dollars from the Japanese company for 10
million and give back the yen for forward exchange rate 95¥/1$ one year later. The total amount
of Japanese company receives will be 950 million yen to pay its own debt. It is better when the
exchange rate become 90¥/1$ because at that time they only get 900 million yen at the end of
year. It same as forward contract, but they are entered in firm’s footnotes rather than as balance
sheet items. The result is that both translation and operating exposures are avoided.
3. A6. The steps in a typical letter of credit financed trade transaction are:
1. The importer places an order with the exporter, asking if the exporter is willing to ship
under an L/C.
2. The exporter agrees to ship under an L/C and specifies relevant information such as
prices and terms.
3. The importer applies to the issuing bank for an L/C to be issued in favor of the exporter
for the merchandise it wishes to buy.
4. The importer’s bank(the issuing bank) issues the L/C in favor of the exporter and sends it
to the exporter’s bank.
5. The exporter’s bank advises the exporter of the opening of an L/C in the exporter’s favor.
It may or may not confirm the L/C to add its own guarantee to the document.
6. The exporter ships the goods to the importer and gets the bill of lading from the carrier of
the goods.
7. The exporter presents to exporter’s bank a time draft and other documents as required,
including the bill of lading.
8. The exporter’s bank presents the draft and documents to the importer’s bank for
acceptance.
9. The importer’s bank returns the accepted draft to the exporter’s bank.
10. The exporter’s bank, having received the accepted draft, may sell the acceptance in the
open market at a discount to a portfolio investor or hold the acceptance in its own
portfolio.
11. The exporter’s bank pays exporter. The exporter can receive the discounted cash value of
the acceptance at once or receive the amount of the acceptance when it is maturity.
12. The importer’s bank notifies the importer of the arrival of the documents. The importer
signs a note to pay the importer’s bank in the maturity day. The importer’s bank releases
shipment.
13. On the maturity day, this bank receives from the importer funds to pay the maturing
acceptance.
14. On the same day, the holder of the matured acceptance presents it for payment and
receives its face value.
4. Tradecard is another type approach to financing foreign trade. TradeCard provides a hosted
technology platform comprised of online services and a global network of trade experts that
connect buyers, suppliers and service providers. This unique offering ensures members have the
data and tools needed to automate and optimize transactions in the extended supply chain.
The buyer creates and sends TradeCard a purchase order through their EDI, ERP, or user
interface on their Internet browser. The seller receives an automatic email notice from TradeCard
stating that a purchase order is quot;pendingquot;. The seller then approves the purchase order or
renegotiates its terms with the buyer, if necessary. Upon approval by the seller, the purchase
order is stored in TradeCard. At this point in the transaction, the seller can select payment
protection, if available. Once the goods are ready for shipment, the seller creates an invoice and
packing list on TradeCard. Since most of the invoice data are found on the original purchase
order, TradeCard automatically pre-populates the invoice document, so that the seller only needs
to fill in new data.
The TradeCard compliance engine then matches the invoice and other optional documents such
as the packing list, proof of delivery and proof of inspection against the purchase order to confirm
documentary compliance. Both buyer and seller are notified if there are any discrepancies and
have the option of negotiating them free of charge online. Once documentary compliance has
been achieved, TradeCard automatically sends payment instructions to a participating financial
institution, which debits the buyer's account and credits the seller's account
Compared to LC-based trade finance, Tradecard approach can
Reduces transaction times and avoiding delays caused by paper-based bank operations
Eliminates costs associated with traditional L/Cs, including charges for transfer, amendments
and checks, protecting the interests of clients and suppliers’ profit margins
Reduces the need for repeated data entry, allows information to be accessed instantly,
increases productivity and efficiency of operations
5. Letter of credit (L/C): is a bank’s promise to pay issued by a bank at the request of an importer
(the applicant/buyer), in which the bank promises to pay an exporter (the beneficiary of the letter)
upon presentation of documents specified in the L/C. An L/C reduces the risk of noncompletion,
because the bank agrees to pay against documents rather than actual merchandise.
Forfaiting: is a specialized technique to eliminate the risk of nonpayment by importers in
instanced where the importing firm and/or its government is perceived by the exporter to be too
risky for open account credit.
International Financial Tools Preferred Condition
Forfaiting When the exporter has difficulty in ensuring that
the a importer will make payment regard for the
uncertain risk such as political risk, and credit
risk.
Forfaiting is Non-recourse.
Letter of Credit When both side (exporter and importer) have
good credit line.
Strengths-Forfaiting
• Exporter can offer credit to buyer but receive cash payment.
Exporter
• Exporter receives cash immediately upon delivery of the goods or
services.
• No country of origin restrictions as required by Sovereign Export
Promotion Agencies.
• Up to 100% of sale can be financed.
• Forfait financing is 100% non-recourse to the Exporter.
• Eliminates the two key risks – political and commercial credit
risks.
• Protects exporter from foreign exchange fluctuations, interest rate
increases.
• Simple documentation, rapid, flexible deal structuring.
• Improves competitive advantage by providing vendor financing.
• Facilitates expansion of markets to riskier countries.
• Commitments can be received within a few days depending on
country of import.
• No credit administration, collection efforts with related costs.
• No contingent liability, enhances balance sheet ratios.
• Eliminates export credit insurance premiums and commercial
banking fees.
• Financing is transacted confidentially, unlike commercial loans.
• Importer gains access to extended term financing with fixed or
Importer
floating interest rates.
• Forfait financing has simple documentation and is very flexible.
• Can receive financing for up to 100% of cost of goods.
• Provides access to major hard currency financing.
• Repayment can be tailored to the buyer’s cash flow profile.
• Goods from a variety of sources can be financed.
• There is no acceleration clause in the case of non-payment of one
bill, which is traditionally featured in commercial loan agreements.
Investor The receivable becomes a form of debt instrument that can be sold on the
6. secondary market, or are presented by bills of exchange or promissory
note.
Weakness-Forfaiting
• Forfait financing does not cover pre-delivery risks.
Exporter
• An export shipment is effectively open account until a
commitment is obtained from the forfaiter and exporter fulfills
their obligations.
• Exporter has the responsibility to ensure that the debt is legal and
enforceable.
• Exporter must insure that the debt instrument is properly
guaranteed.
• The cost of forfait financing can be higher than commercial bank
financing.
• The importer must pay for both forfait financing and the fee for
Importer
bank’s guarantee.
• Cost for financing and bank guarantee can be more than direct
credit loan.
• The bank aval or guarantee may be counted against and reduce
availability of Importers bank credit lines.
• Importer may need to cover foreign exchange risk over repayment
period.
Investor Have to bear all risks.
Strengths-L/C
Exporter 1. The L/C can reduce the risk- the exporter can sell against at bank’s
promise to pay rather than against the promise of a commercial firm.
2. The exporter is in a more secure position as to the availability of foreign
exchange to pay for the sale.
3. an exporter may find that an order backed by an irrevocable L/C will
facilitate obtaining pre-export financing in the home country.
Importer Importer need not pay out finds until the documents have arrived at a local
port or airfield and unless all conditions stated in the credit have been
fulfilled.
Investor (Banks) Earning service fee and interest fee.
If the amount is not collected, the bank can perform recourse to quire the
exporter to repay all funds.
Weakness-L/C
Exporter 1. Should pay service fee and interest fee to the bank.
2. If the documents don’t comply with the terms or conditions of L/C, the
seller should subject fines.
It’s a competitive disadvantage for the exporter to demand automatically an
L/C from an importer who has a good credit record and there is no concern
regarding the economic or political conditions of the importer’s country
Importer The quality of goods can’t be guaranteed. If all export documents are
complied with the terms of L/C, importer should pay all the amount of the
goods.
The main disadvantages are the fee charged by the importer’s bank for
issuing its L/C and the possibility that the L/C reduces the importer’s
borrowing line of credit with its bank.
Investor More and more customers transact by telegraphic transfer (T/T)
7. Crosswell
Describe the uncovered interest arbitrage strategy proposed by the Mathieux brothers.
Your discussion of this strategy should be in reference to information provided on
pp.99-101 of the case.
Mathieux brother’s proposal is to combine extended credit terms to local distributors with
Brazil’s high domestic interest rates to effectively lower the diaper’s price to Brazilian
consumers. Foreign corporations (i.e., European automobile manufacturers and Chinese textile
firms) were successfully undercutting national companies’ prices by taking advantage of Brazil’s
high interest rates. Borrowing rates in the U.S. were substantially lower than deposit rates in
Brazil, and given the stable exchange rate, this created an opportunity for uncovered interest rate
arbitrage gains.
The basic strategy was based on the ability to get extended terms from the seller, Crosswell
International, and get paid for the goods quickly from the local Brazilian distributor. If the
distributor could obtain 180-day credit terms, or a standard 180-day letter of credit from
Crosswell, the firm could sell the goods into the local market for cash within 30 days of receiving
the diapers at port. The cash proceeds from the resale could then be invested in the relatively
“high-yielding” Real-denominated deposit rates. At the end of the following four to five months
when the payment on the goods to Crosswell was due, the deposits could be closed and the profits
taken to offset the cost of financing the purchase. This would reduce the R$6.86 per case
financing cost of the distributor as described in the baseline analysis in this case. Of course, this
was only true if the Real/dollar exchange rate was stable over the period.
What were the potential benefits and risks of this strategy to Crosswell.
The potential benefits and risks of this strategy to Crosswell are:
Benefit: Using UIA to offsetting the distributor’s cost in order to lower diapers’ price could
effectively made Crosswell enter in the Brazil’s diaper market and gain profit for the long-run.
Risk: a.) The Real/dollar exchange rate couldn’t be stable forever. If the Real are depreciate
significantly against the dollar, there will be less or even no profit for the distributor to offset its
cost. b.) The collection of the cash proceeds from the resale could be late, if the sales of diaper are
not good. c.) The interest rate differentials couldn’t persist over the long-run.
Suggest business approaches which might modify the strategy to reduce risk elements.
For the unstable exchange rate, I suggest The Mathiuex brothers should take on more
exchange rate risk themselves by selling the diapers at a fixed price in Brazilian Real. This
will reduce the risk to the Brazilian distributor. With less risk, the distributor cannot require
such a large margin. To assure the diaper sales for generating cash proceeds, Mathiuex
brothers should find a distributor who has more experience about grocery store instead of the
one who involved in hospital and disposable hygiene markets. To avoid long-run interest rate
decreasing, Crosswell could export goods into Uruguay and truck goods into Brazil for
paying the lower import tariffs in order to reduce prices.