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A transaction that requires payment or receipt (settlement) in a foreign currency is called a foreign currency transaction. A transaction with a foreign company that is to be settled in dollars is not a foreign currency transaction to a U.S. firm because the number of dollars to be received or paid to settle the account is fixed and remains unaffected by subsequent changes in the exchange rate. Thus, a transaction of a U.S. firm with a foreign entity to be settled in dollars is accounted for in the same manner as if the transaction had been with a U.S. company.
A foreign currency transaction will be settled in a foreign currency, and the U.S. firm is exposed to the risk of unfavorable changes in the exchange rate that may occur between the date the transaction is entered into and the date the account is settled. For example, assume that a U.S. firm purchased goods from a French firm and the U.S. firm is to settle the liability by the payment of, francs. The French firm would measure and record the transaction as normal because the billing is in its reporting currency. Because the billing is in a foreign currency (denominated in francs), the U.S. firm must translate the amount of the foreign currency payable into dollars before the transaction is entered in its accounts. An increase (decrease) in the direct exchange rate will increase (decrease) the number of dollars required to buy the fixed number of francs needed to settle the foreign currency liability.
The direct exchange rate is often said to be increasing, or the foreign currency unit to be strengthening, if more dollars are needed to acquire the foreign currency units. If fewer dollars are needed, then the foreign currency is weakening or depreciating in relation to the dollar (the direct exchange rate is decreasing). Consider the following information.
Direct Exchange Rates
Yen Strengthens Yen Weakens
Beginning of year $1 =1 Yen $1 =1 Yen
End of year $2 =1 Yen $.5 =1 Yen
Would a US company holding a $, receivable denominated in Yen prefer the Yen to strengthen or weaken? In this case, the company prefers a strengthened Yen because more dollars would be received and an exchange gain would be incurred. If the transaction involved a payable denominated in Yen, the firm would have incurred an exchange rate loss because more dollars would have to be paid. As will be shown later, because firms cannot perfectly predict changes in exchange rates, the U.S. firm may hedge, that is, protect itself against an unfavorable change in the exchange rate by using derivatives.
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1. In many cases the bench to the occurrence of losses is not always result in gains or profits therefore be provision for impairment foreign exchange rates work
2. No one is recognized as exchange rate differentials in favor of the facility, but the occurrence of incident One application of the principle of monetary time check verification process by sale or other payment or collection, and the situation in the end of the year on the closure of the budget
3. The general trend for each currency can guide him and it often is used in case of speculation in the stock exchange, but not only for the experience and sophistication
4. study the economic situation of the State Currency Is it a politically stable and economically often exchange-rate economic events affected by the boom-bust and political, such as what happened in the Gulf War of fluctuating exchange for many currencies
5. In many of the companies that gets up the work of the budget in local currency and the translation of that budget coin headquarters in the case of branches or multinational companies
