Sign In
Not register? Register Now!
Essay Available:
Pages:
3 pages/β‰ˆ825 words
Sources:
Check Instructions
Style:
APA
Subject:
Accounting, Finance, SPSS
Type:
Essay
Language:
English (U.S.)
Document:
MS Word
Date:
Total cost:
$ 14.04
Topic:

Foreign Currency Risk in Companies

Essay Instructions:

Foreign Currency Risk
Overview
Albert, CEO of XYZ, Inc., desires to expand the company’s sales through exports to three foreign subsidiaries. Albert knows that the target subsidiaries' countries 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, as 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.
For more information on corporate strategies regarding hedging foreign exchange risk, refer to Chapter 9 of Advanced Accounting.
You may make any assumptions needed for the completion of this assignment.
Instructions
Write a 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 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.
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 to minimize balance sheet exposure. Provide support for your 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 methods of translation.
Assuming one of the subsidiaries of XYZ, Inc. is in a highly inflationary country, determine the appropriate translation method under FASB and provide the theoretical justification for your response.

Essay Sample Content Preview:

Foreign Currency Risk
Author's Name:
Institutional Affiliation:
Submission Date:
Foreign Currency Risk
Foreign currency risk refers to the unhinged circumstance which companies experience in the overseas exchange market. Companies that desire to sell their products into overseas countries tend to experience foreign currency risk since they operate with a different currency, which exposes them to high fluctuation risks (Hoyle et al., 2015). Therefore, it is crucial for any firm planning to engage in foreign business to adopt strategies that can help them mitigate losses that they are likely to incur.
Q1
The transaction, operating, and accounting exposures are among the foreign currency risks that company XYZ is likely to face. Accounting exposure refers to the changes that happen in the financial statements due to changes in currency. On the other hand, operating exposure refers to the economic impacts of a firm cash flow due to the changing or fluctuating foreign exchange rates (Hoyle et al., 2015). Furthermore, transaction exposure refers to the risks that impact the whole organization due to the changes in the currency rates.
XYZ Company expanding its business means that some main financial statement effects would be caused by the accounting, transaction, and operating exposure. Some of these financial statements include the balance sheet and the income statement. This is because the firm will always experience unanticipated changes since the foreign exchange rates keep changing (Hoyle et al., 2015). Therefore, before the CEO makes the final decision of expanding the business to foreign nations, it is crucial to bear in mind that the company's profits, liabilities, and assets are getting exposed to foreign risks.
Q2
There are several hedges regarding foreign exchange risks. They include the money market and the forward contact. Money market hedge refers to companies' technique to lock in the value of the overseas currency transaction in an organization's domestic currency (Henderson et al., 2015). It plays a crucial role in helping the local firm reduce its exchange rate while conducting business transactions with overseas companies. On the other hand, a forward contact hedge refers to a hedging product that enables the firm to protect itself from currency market volatility.
One of the most beneficial risk mitigation strategies that I would commend for the XYZ Company is the money market hedge. Transacting business with foreign nations means that the company money is at risk of losing...
Updated on
Get the Whole Paper!
Not exactly what you need?
Do you need a custom essay? Order right now:
Order

πŸ‘€ Other Visitors are Viewing These APA Essay Samples: