Title: GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASIS
1GLOBAL 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
2CHAPTER TWO
- FOREIGN CURRENCIES AND EXCHANGE RISK MANAGEMENT
3FOREIGN 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.
4FX RISKS SOLUTIONS CONTDImporting Goods for
Cash Problem
5FX 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.
6Table 2.1US Dollar Exchange Rates in Number of
Foreign Currency Units Per - Thursday October
7, 1999
7FX RISKS SOLUTIONS CONTD Importing Goods for
Cash
8FX RISKS SOLUTIONS CONTD Importing Goods for
Cash
9FX 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?
10FX RISKS AND SOLUTIONSImporting Goods for Credit
- Vendors allow you to pay in two-months
- however, the Singapore and British Pound are
floating currencies.
11The British Pound Floats
12The Singapore Floats
13Table 2.3Cost of Motherboards Using
Credit Paying FC Two-Months After Purchase on
September 28, 2005
14Table 2.3Cost of Motherboards Using
Credit Paying FC Two-Months After Purchase on
September 28, 2005
15FX 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.
16Derivatives 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)
17Derivatives - Forward Contracts
- September 28, 2005
- British Pound Per Dollar
- Spot .5560
- One Month Forward .5847
- Two Months Forward .5848
- Three Months Forward .5848
18DerivativesForward Contracts
- Table 2.3 shows the impact of applying the
information on forward exchange rates to the
purchase of motherboards.
19Table 2.3 Cost of Motherboards Using
Credit Paying FC Two-Months After Purchase on
September 28, 2005
20Table 2.3 Cost of Motherboards Using
Credit Paying FC Two-Months After Purchase on
September 28, 2005