Business

Inflation and Exchange Risk Let us begin by holding relative prices constant and looking only at the effects of general inflation. This condition means that if the inflation rate is, say, 10%, the price of every good in the economy rises by 10%. In addition, we will initially assume that all goods are traded in […]

Importance of the Real Exchange Rate The distinction between the nominal exchange rate and the real exchange rate is important because of their vastly different implications for exchange risk. A dramatic change in the nominal exchange rate accompanied by an equal change in the price level should have no effects on the relative competitive positions

Real Exchange Rate Changes and Exchange Risk The exchange rate changes that give rise to operating exposure are real exchange rate changes. As presented in Chapter 4, the real exchange rate is defined as the nominal exchange rate (e.g., the number of dollars per franc) adjusted for changes in the relative purchasing power of each

The Time Pattern of Economic Exposure Application American Filmmakers Suffer When the Euro Slumps According to a story in the Wall Street Journal (May 19, 2000, p. B1), “The euro’s plunge against the dollar is casting a pall over this year’s Cannes Film Festival, forcing European distributors to curtail their purchases of American films and

Foreign Exchange Risk and Economic Exposure The most important aspect of foreign exchange risk management is to incorporate currency change expectations into all basic corporate decisions. In performing this task, the firm must know what is at risk. However, there is a major discrepancy between accounting practice and economic reality in terms of measuring exposure,

Two comments are appropriate here. 1. Fluctuations in reported earnings in the preceding example are reduced significantly under FASB 52 when the local currency is the functional currency, as compared with the case when the U.S. dollar is the functional currency. 2. Key financial ratios and relationships—such as net income-to-revenue, gross profit, and debt-to-equity—are the

Application of FASB No. 52 Sterling Ltd., the British subsidiary of a U.S. company, started business and acquired fixed assets at the beginning of a year when the exchange rate for the pound sterling was £1=$1.50. The average exchange rate for the period was $1.40, the rate at the end of the period was $1.30,

Factors Indicating the Appropriate Functional Currency Companies will usually explain in the notes to their annual report how they accounted for foreign currency translation. A typical statement is that found in Dow Chemical’s 1999 Annual Report: The local currency has been primarily used as the functional currency throughout the world. Translation gains and losses of

Statement of Financial Accounting Standards No. 52 The current translation standard— Statement of Financial Accounting Standards No. 52 (FASB 52)—was adopted in 1981.10 According to FASB-52, firms must use the current rate method to translate foreign-currency-denominated assets and liabilities into dollars. All foreign currency revenue and expense items on the income statement must be translated

Which hedging strategy (if any) appears to underlie their hedging activities? What are the latest FASB pronouncements dealing with currency translations? 3. Review the annual reports on the Web sites of three of the multinational companies listed in www.reportgallery.com. a. Which types of currency exposure are these companies hedging? b. Which hedging techniques are they