Foreign Currency Transactions: Jones Corporation. Case Study

Foreign Currency Transactions: Jones Corporation
Student’s Name
Institutional Affiliation
Foreign Currency Transactions
A foreign currency transaction occurs when fixed payables or receivables are done in a currency that is not denominated in a locally functional currency. Whenever financial transactions are done, an understanding of the denominated currency is important because it determines who gets to benefit or lose from the effects of the differences in the exchange rates. This implies that whoever gets to use the denominated currency as foreign currency, stands to gain or lose. Foreign currency exchange rate values can be quoted directly as an expression of its worth or indirectly by not capturing the exact worth of a currency. Most foreign currencies are quoted in United States Dollars.
Foreign Exchange Calculations and risk
There are two ways in which foreign currency exchange rates can be done. The first way is where the delivery of foreign currency is done immediately, in what is called ‘spot rate’. The second way occurs where a contractual agreement is done and the delivery of foreign currency is done in the future, and this is called ‘forward rate’. Forward contracts are also called ‘hedge contracts’ because the parties avoid risk of loss in case of market volatility by locking in prices (Caparole,et al, 2015).
As mentioned above, foreign exchange transactions can be spot rated or forward rated (Hodrick, 2014). Each of these two presumptions have determining factors that are either political or economic in nature. The interest rate differences between the involved countries, is usually given two assumptions. The most common assumption is that the currency is denominated in US dollars. In this case, there is no special consideration made to the nationality of the business partners because the US dollar is uuniversally accepted. The second assumption is where the transaction is denominated in foreign currency. In this case, there is a risk exposure to the transacting partners and this calls for special accounting considerations.
Most companies with expectations of future foreign exchange requirements are able to fix the transactions in the current date. However beneficial this looks, there are still bottlenecks that can occur when it comes to foreign exchange including transaction, translation and economic risks. Company policies should be harnessed to cushion these risks.
Forward Foreign Exchange Contract
This is a contract that enables the transacting parties to set an exchange rate today for a future transaction. In the agreement, there is a commitment to do foreign currency exchange at an agreed rate at a future date. The forward foreign exchange contract is depended upon a time variation premium for risk ((Hodrick, 2014).This however does not express that there are premiums required for these kind of contract. The parties engage services of banks which handle the forward foreign transaction and ch...