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GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASIS

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France Franc. 1-month forward. 3-months forward. 6-months forward. Germany Mark. 1-month forward ... Belgium Franc. Brazil Real. Britain Pound. 1-month forward ... – PowerPoint PPT presentation

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Title: GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASIS


1
GLOBAL ACCOUNTING AND CONTROL A MANAGERIAL
EMPHASIS
  • Sidney J. Gray, University of New South Wales
  • Stephen B. Salter, University of Cincinnati
  • Lee H. Radebaugh, Brigham Young University

2
CHAPTER TWO
  • FOREIGN CURRENCIES AND EXCHANGE RISK MANAGEMENT

3
FOREIGN EXCHANGE RISKS AND SOLUTIONSImporting
for Cash Problem
  • Lets explain with an example.
  • Your firm, Alamo Computers of San Antonio, Texas,
    USA, wishes to buy some computer motherboards.
  • Here are three suppliers with prices in their
    local currency.

4
FX RISKS SOLUTIONS CONTDImporting Goods for
Cash Problem
5
FX RISKS SOLUTIONS CONTD Importing Goods for
Cash Problem
  • What do we do now?
  • Calculate the price in a common currency (US
    would be logical since you are US based company).
  • How do we do that?
  • Get the price in local currency (LCP) for each
    location from the table.
  • Divide the LCP by the LC/US exchange rate or
    multiply the LCP by the US/LC exchange rate to
    get the US Price.
  • See Tables 2.1 or www.oanda.com.

6
Table 2.1US Dollar Exchange Rates in Number of
Foreign Currency Units Per - Thursday October
7, 1999
7
FX RISKS SOLUTIONS CONTD Importing Goods for
Cash
8
FX RISKS SOLUTIONS CONTD Importing Goods for
Cash
9
FX RISKS AND SOLUTIONSImporting Goods for Credit
  • What if you want to buy on credit?
  • Will the exchange rate stay the same?
  • Is Singapore still the cheapest supplier?

10
FX RISKS AND SOLUTIONSImporting Goods for Credit
  • Vendors allow you to pay in two-months
  • however, the Singapore and British Pound are
    floating currencies.

11
The British Pound Floats
12
The Singapore Floats
13
Table 2.3Cost of Motherboards Using
Credit Paying FC Two-Months After Purchase on
September 28, 2005
14
Table 2.3Cost of Motherboards Using
Credit Paying FC Two-Months After Purchase on
September 28, 2005
15
FX RISKS AND SOLUTIONSImporting Goods for Credit
  • Can you protect yourself from fluctuations in the
    exchange rate?
  • You can neutralize the risk of FC changing in
    value by using a derivative.
  • Derivative is
  • a contract whose value in local currency changes
  • with price movements in related commodity or
    financial instrument such as a foreign currency
  • Foreign Exchange (FX) Derivatives can include
    forward contracts, futures, swaps and options.

16
Derivatives Forward Contracts
  • Forward Contract
  • contract between a foreign currency trader and a
    client
  • for the future sale or purchase of foreign
    currency at a forward rate.
  • Forward Rate
  • contractual rate between the FX trader/client for
    the amount of currency A needed to acquire one
    unit of currency B at a fixed future date.
    (Table 2.1)

17
Derivatives - Forward Contracts
  • September 28, 2005
  • British Pound Per Dollar
  • Spot .5560
  • One Month Forward .5847
  • Two Months Forward .5848
  • Three Months Forward .5848

18
DerivativesForward Contracts
  • Table 2.3 shows the impact of applying the
    information on forward exchange rates to the
    purchase of motherboards.

19
Table 2.3 Cost of Motherboards Using
Credit Paying FC Two-Months After Purchase on
September 28, 2005
20
Table 2.3 Cost of Motherboards Using
Credit Paying FC Two-Months After Purchase on
September 28, 2005
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