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International Accounting - Unlocked

The document discusses foreign currency transactions and hedging foreign exchange risk, detailing the valuation of forward contracts and options. It provides examples of accounting entries for foreign currency transactions, including gains and losses, and explains the concepts of intrinsic and time value of options. Additionally, it outlines cash flow hedges and fair value hedges related to foreign currency options.

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mahmoudsobhi948
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86 views23 pages

International Accounting - Unlocked

The document discusses foreign currency transactions and hedging foreign exchange risk, detailing the valuation of forward contracts and options. It provides examples of accounting entries for foreign currency transactions, including gains and losses, and explains the concepts of intrinsic and time value of options. Additionally, it outlines cash flow hedges and fair value hedges related to foreign currency options.

Uploaded by

mahmoudsobhi948
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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International Accounting

Dr. Shorouk Esam El-Din Yassien


Lecturer at Accounting
Department (English Section),
Faculty of Commerce, Benha University
Foreign Currency Transactions and
Hedging Foreign Exchange Risk
First :determining the value of the premium or discount of the forward contract :
since forward rate more than current spot rate in contract date ,there is a premium
valued $5000= $Mex1000000 (0.085 – 0.080)
Sept 30 = 5000 *2\3=3333
Oct 31= 5000*(1\3)=1667
Second : determining the value of A\P in dollar :
Date spot price value in $ change in value gain or loss
1\8 0.080 80000 -- ---
30\9 0.086 86000 6000 loss
31\10 0.091 91000 5000 loss
Third : determining fair value of forward contract :
Date forward rate fair value change asset or liab
1\8 0.085 0 -----
30\9 0.088 3000* +3000 asset
31\10 0.091 6000 + 3000 asset
Fourth: entries of foreign currency transaction and forward contract
Note :There is no entries for recording forward contract and its fair value equal zero
Foreign Currency Option used to Hedge a
Recognized Foreign-Currency-Denominated Asset
First: determining the price of purchasing the option(premium):1,000,000 Euros * $0.009
so . Option contract costs $9000
Second : determining the value of A\R in dollar :
Date spot price value in $ change in value gain or loss
1\12 1.50 1500000 -- ---
31\12 1.51 1510000 +10000 gain
1\3 1.48 1480000 -30000 loss

Third : determining fair value of option contract :


Date option premium price fair value change f
1\12 0.009 9000 -----
31\12 0.006 6000 -3000
1\3 0.020 20000 +14000
Fourth: determining intristic value and time value of option contract:
Date fair value intrinsic value time value change in time value
1\12 9000 0 9000 -----
31\12 6000 0 6000 -3000
1\3 20000 20000 0 -6000
Strike price:1.50
Purchase option Sales option

Market price> Strike Market price< Strike In The Money (ITM)


price price Means it has an
intrinsic value
Market price=strike Market price=strike At The Money (ATM)
price price

Market price< Strike Market price> Strike Out The Money


price price (OTM)
Foreign Currency Option used to Hedge a Recognized
Foreign-Currency-Denominated Asset
 Our Eximco Company purchases an OPTION to sell
1,000,000 Euros for $1.50 each. Option contract costs
$9000

 Cash flow Hedge


 Dr. Accounts Receivable $1,500,000

 Cr. Sales $1,500,000

 Dr. Foreign Currency Option 9000

 Cr. Cash 9000


 December 31, $1.51 per Euro

 Dr. Accounts Receivable 10,000

 Cr. Foreign Currency Gain 10,000

 Dr. Loss on Foreign Currency Option 10,000

 Cr. AOCI 10,000

 Dr. AOCI 3000

 Cr. Foreign Currency Option 3000

 Dr. Option Expense 3000

 Cr. AOCI 3000


 Example 2: Cash Flow Hedge
 March 2, 2018 suppose that 1Euro = $1.48
 Dr. Foreign Exchange Loss 30,000
 Cr. Accounts Receivable 30,000
 Dr. AOCI 30,000
 Cr. Gain on Foreign Currency Option 30,000
 Dr. Foreign Currency Option 14,000
 Cr. AOCI 14,000
 Dr. Option Expense 6000
 Cr. AOCI 6000
 Dr. Foreign Currency 1,480,000
 Cr. Accounts Receivable 1,480,000
 Dr. Cash 1,500,000
 Cr. Foreign Currency 1,480,000
 Cr. Foreign Currency Option 20,000
Option Designated as Fair Value
Hedge
 Gain or loss directly to net income
 No recognition in change in time value of option
 No difference in cash flows or net income recognized
First: determining the price of purchasing the option(premium):1,000,000 Euros *
$0.0052 so . Option contract costs $5200
Second : determining the value of A\P in dollar :
Date spot price value in $ change in value gain or loss
1\8 0.080 80000 -- ---
30\9 0.086 86000 +6000 loss
31\10 0.091 91000 +5000 loss
Third : determining fair value of option contract :
Date option premium price fair value change f
1\8 0.0052 5200 -----
30\9 0.0095 9500 +4300
31\10 0.0110 11000 +1500
Fourth: determining intristic value and time value of option contract:
Date fair value intrinsic value time value change in time value
1\8 5200 0 5200 -----
30\9 9500 6000 3500 - 1700
31\10 11000 11000 0 - 3500
Purchase option Sales option

Market price> Strike Market price< Strike In The Money (ITM)


price price Means it has an
intrinsic value
Market price=strike Market price=strike At The Money (ATM)
price price

Market price< Strike Market price> Strike Out The Money


price price (OTM)

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