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Foreign Currency Risk (Example)

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FOREIGN CURRENCY RISK AFFILIATION NAME Types of hedges regarding foreign Foreign exchange risk is when the value of an investment in a different country fluctuates due to currency exchange. If a domestic currency increases against another country’s exchange profits in the foreign country declines after the exchange is one back to the domestic currency (Narvaez 2015). Many multinational Companies use long-term hedging in minimizing risks caused by exchange rates and also forex hedging. Long-term hedging comprises various currency swap; one occurs at the start of the long-term contract and the other swap occurs at a certain date. Analysts argue that the long-term hedging is the best though it can lead an MNC to be over-hedge. It is essential to understand forex risk in Company’s risk management and control not to fall under traps of over-hedging their forex risks (Narvaez 2015). XYZ Company's transactions would be involved in selling uncertain setting a Company’s functional currency (ey.com 2013) ASC 831 states that if an economy qualifies as hyperinflationary financial reports are remeasured as if the reporting entity’s currency is the functional currency. Differences in foreign exchange are recorded in the comprehensive statement of income (ey.com 2013).IFRS states that even though an economy qualifies as hyper-inflationary the functional currency is not lost. Any amounts not available at the current rate at the end and at the end of the financial period; they should be evaluated using a general price index. The amounts are then translated into the reporting currency using the current rate. References Analystforum.com (2012) Temporal compared with Current Method. Retrieved from www.analystforum.com Ey.com (2013) US GAAP versus IFRS. Retrieved from www.ey.com K. (2015) What CFOs Should Know About Foreign Exchange Risks? Retrieved from ww2.cfo.com Singh J. (2017) Difference between Spot Market and Forward Market |Foreign Exchange. Retrieved from http://www.economicsdiscussion.net/difference-between/difference-between-spot-market-and-forward-market-foreign-exchange/615 [...]

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Assignment 2: Foreign Currency Risk Due Week 9 and worth 310 points Albert, CEO of XYZ, Inc., desires to expand the company’s sales through exports to three (3) foreign subsidiaries. Albert knows that the target subsidiaries are located in countries that require transactions to be denominated in the local currencies. Albert has researched foreign currency risk and knows that there is accounting exposure in accounting statements, operating exposure in future cash flows, and transaction exposure in outstanding obligations. Albert does not understand how these risks apply to XYZ, Inc. under his proposal or if there are any mitigating risk strategies available. Albert requests you, the head of the Risk Management division, to prepare a report that he can present to the Board of Directors on the potential foreign currency risk if XYZ, Inc. expands sales into these markets. XYZ, Inc.’s reporting currency is the U.S. dollar and the subsidiaries would purchase the merchandise as inventory items. Note: You may create and / or make all necessary assumptions needed for the completion of this assignment. Write a three to five (3-5) page paper in which you: Specify accounting exposure, operating exposure, and transaction exposure. Determine the main financial statement effects of each type of exposure if XYZ, Inc. expands as proposed. Determine two (2) types of hedges regarding foreign exchange risk, in general, and recommend the most advantageous risk mitigation strategy for XYZ, Inc. Provide support for your rationale. Note: Refer to Chapter 9 of the textbook for more information on corporate strategies regarding hedging foreign exchange risk. Determine the main accounting assumptions underlying each currently used method (e.g., current rate method and temporal method). Determine the fundamental differences in balance sheet exposure from the application of each method. Suggest the translation method that XYZ, Inc. should use in order to minimize balance sheet exposure. Provide support for you choice. Compare the U.S. GAAP approach to the IFRS approach of translating foreign currency financial statements. Determine the main similarities and differences between the two (2) methods of translation. Assuming one (1) of the subsidiaries of XYZ, Inc. is located in a highly inflationary country, determine the appropriate translation method under FASB and provide the theoretical justification for your response. Use at least two (2) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources. Your assignment must follow these formatting requirements: Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions. Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length. The specific course learning outcomes associated with this assignment are: Examine and prepare the accounting entries for intra-entity asset transactions. Examine the impact that specific differences between IFRS and U.S. GAAP have on financial statements. Explain foreign currency transactions and analyze the accounting requirements for the translation of financial statements of foreign entities. Use technology and information resources to research issues in advanced accounting. Write clearly and concisely about advanced accounting using proper writing mechanics. Click here to view the grading rubric. By submitting this paper, you agree: (1) that you are submitting your paper to be used and stored as part of the SafeAssign™ services in accordance with the Blackboard Privacy Policy; (2) that your institution may use your paper in accordance with your institution's policies; and (3) that your use of SafeAssign will be without recourse against Blackboard Inc. and its affiliates.

Subject Area: Accounting

Document Type: Reports

This project has already been completed by one of the Studybay experts. The client rated this project:

Project's rating is 5/5

Price $35

Words 1100

Pages 4

Completed in 22 days

Expert Nareyle

Client Review

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Positive
04.20.2018

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