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