Course name:

International Accounting
Lecture Five
Chapter (6)
part (III)
Hedging foreign exchange risk
(selling process)
 Hedging against foreign currency risk
Transaction Account effected Increase in foreign rates Decrease in foreign rates
Export Account receivables Gain Loss
import Account payables Loss Gain
• Most two common type of derivatives are:
1. Forward contracts: (Hedge of unrecognized foreign currency firm
commitment).
2. Foreign currency option contracts: (Hedge of a forecasted foreign currency
denominated transaction)
Forward contracts
Buying Selling
(1) The forward contract receivable form (1) The forward contract payable to the exchange
exchange dealer will be effected (change with dealer will be effected (change with the
the change in exchange rate) “investment in change in exchange rate) “investment in
foreign currency”. foreign currency”
(2) Dollar amount payable to the exchange (2) Dollar amount receivable from the exchange
dealer will be fixed (according to the locked dealer will be fixed (according to the locked
price). price).
Forward contract
(selling process)
 Forward contract (Sell)
Example (1):
Forward contract
In Dec., 1 2020 XYZ a multinational USA firm sold goods to
foreign customer costing 40,000 US dollar for 10,000 (LCU), and
the customer will make full payment in March.1.2021. In
Dec.1.2020 firm entered in a forward contract to sell 10,000
(LCU) for 9.5 on March.1.2021 .
The spot rate and forward rates for the (LCU), as follows:
Day Spot rate Dollar $ Forward rate for payable
Dec.1 9.53$ 9.5$
Dec. 31 9.49$ 9.42$
March . 1 9.48$

Required:
Prepare journal entries related to the firm commitment and forward contract
 Forward contracts (Sell)
Example (1):
Date transaction Debt Credit
Dec.1 Account receivables (9.53 x 10,000) 95300
Sales revenue 95300
Dec. Dollar receivable form exchange dealer (10,000 x 9.5) 9,5000
1 Foreign currency payable to exchange dealer 9,5000

Dec. Transaction lose (9.53-9.49) x 10,000 400

31 Account receivables 400
Dec. FC payable to exchange dealer (9.5-9.42) x 10,000 800
31 Transaction gain 800
March Transaction lose (9.49-9.48) x 10,000 100
1 Account receivables 100

March Transaction lose (9.48-9.42)x10,000 600

1 Foreign currency payable to exchange dealer 600
March Investment in foreign currency (9.48 x 10,000) 94800
1 Account receivables (95300-400-100) 94800

March FC payable to exchange dealer (95000-800+600) 94800

1 Investment in foreign currency 94800
March Cash 95000
1 Dollar receivable form exchange dealer 95000
 Forward contract (Sell)
Example (2):
Firm commitment + forward contract
In Dec., 1 2020 a German firm agreed to sell equipment (with an
ask price 100,000 (LCU)) to a foreign customer. Firm will make
delivery and pay for the equipment on March.1.2021. In
Dec.1.2020 firm entered in a forward contract to sell 100,000
(LCU) for 0.8 on March.1.2021 .
The spot rate and forward rates for the (LCU), as follows:

Day Spot rate Dollar $ Forward rate for payable

Dec.1 0.85$ 0.8$
Dec. 31 0.83$ 0.76 $
March . 1 0.79$

Required:
Prepare journal entries related to the firm commitment and forward contract
 Forward contracts (Sell)
Example (2):
Date transaction Debt Credit
Dec.1 Dollar receivable form exchange dealer (100,000 x 0.8) 80,000
Foreign currency payable to exchange dealer 80,000
Dec. Foreign currency payable to exchange dealer 4000
31 Transaction gain (0.8-0.76)x 100,000 4000

Dec. Foreign exchange lose 4000

31 Firm commitment 4000

March Transaction lose (0.79-0.76)x100,000 3000

1 Foreign currency payable to exchange dealer 3000

March Firm commitment 3000

1 Transaction gain 3000
March Investment in foreign currency (100,000 x 0.79) 79,000
1 Firm commitment ( 4000 – 3000) or (80,000 – 79,000) 1000
Sales (100,000 x 0.8) 80,000

March FC payable to exchange dealer (80,000 -4000 + 3000) 79,000

1 Investment in foreign currency (0.79x100,000) 79,000
March Cash 80,000
1 Dollar receivable form exchange dealer 80,000
 Forward contract (Sell)
Example (3):
Firm commitment + forward contract
In Dec., 1 2020 a German firm agreed to sell equipment (with an
ask price 10,000 (LCU)) to a foreign customer. Firm will make
delivery and pay for the equipment on March.1.2021. In
Dec.1.2020 firm entered in a forward contract to sell 10,000
(LCU) for 9.48 on March.1.2021 .
The spot rate and forward rates for the (LCU), as follows:
Day Spot rate Dollar $ Forward rate for payable
Dec.1 9.54$ 9.48$
Dec. 31 9.49$ 9.44 $
March . 1 9.47$

Required:
Prepare journal entries related to the firm commitment and forward contract
 Forward contracts (Sell)
Example (3):
Date transaction Debt Credit
Dec.1 Dollar receivable form exchange dealer (10,000 x 9.48) 94800
Foreign currency payable to exchange dealer 9480
Dec. Foreign currency payable to exchange dealer 400
31 Transaction gain (9.48-9.44)x 10,000 400

Dec. Foreign exchange lose 400

31 Firm commitment 400

March Transaction lose (9.47-9.44)x10,000 300

1 Foreign currency payable to exchange dealer 300

March Firm commitment 300

1 Transaction gain 300
March Investment in foreign currency (10,000 x 9.47) 94700
1 Firm commitment ( 400 – 300) or (9480-9470) 100
Sales (10,000 x 9.48) 94800

March FC payable to exchange dealer (9480-400 + 300) 94700

1 Investment in foreign currency (10,000 x 9.47) 94700
March Cash 94800
1 Dollar receivable form exchange dealer 94800
 Forward contract (Sell)
Example (4):
Firm commitment + forward contract
In Dec., 1 2020 a German firm agreed to sell equipment (with an
ask price 100,000 (LCU)) to a foreign customer. Firm will make
delivery and pay for the equipment on March.1.2021. In
Dec.1.2020 firm entered in a forward contract to sell 100,000
(LCU) for 0.82 on March.1.2021 .
The spot rate and forward rates for the (LCU), as follows:
Day Spot rate Dollar $ Forward rate for payable
Dec.1 0.87$ 0.82$
Dec. 31 0.83$ 0.77$
March . 1 0.8$

Required:
Prepare journal entries related to the firm commitment and forward contract
 Forward contracts (Sell)
Example (4):
Date transaction Debt Credit
Dec.1 Dollar receivable form exchange dealer (100,000 x 0.82) 82,000
Foreign currency payable to exchange dealer 82,000
Dec. Foreign currency payable to exchange dealer 5,000
31 Transaction gain (0.82-0.77)x 100,000 5,000

Dec. Foreign exchange lose 5,000

31 Firm commitment 5,000

March Transaction lose (0.8-0.77)x100,000 3000

1 Foreign currency payable to exchange dealer 3000

March Firm commitment 3000

1 Transaction gain 3000
March Investment in foreign currency (100,000 x 0.8) 80,000
1 Firm commitment ( 5000 - 3000) or (82,000 – 80,000) 2,000
Sales (100,000 x 0.82) 82,000

March FC payable to exchange dealer (82,000 – 5,000 + 30000) 80,000

1 Investment in foreign currency 80,000
March Cash 82,000
1 Dollar receivable form exchange dealer 82,000
 Forward contract (Sell)
Example (5):
Firm commitment + forward contract
In Dec., 1 2020 a German firm agreed to sell equipment (with an
ask price 10,000 (LCU)) to a foreign customer. Firm will make
delivery and pay for the equipment on March.1.2021. In
Dec.1.2020 firm entered in a forward contract to sell 10,000
(LCU) for 9.5 on March.1.2021 .
The spot rate and forward rates for the (LCU), as follows:
Day Spot rate Dollar $ Forward rate for payable
Dec.1 9.53$ 9.5$
Dec. 31 9.49$ 9.42$
March . 1 9.48$

Required:
Prepare journal entries related to the firm commitment and forward contract
 Forward contracts (Sell)
Example (5):
Date transaction Debt Credit
Dec.1 Dollar receivable form exchange dealer (10,000 x 9.5) 9,5000
Foreign currency payable to exchange dealer 9,5000
Dec. Foreign currency payable to exchange dealer 800
31 Transaction gain (9.5-9.42)x 10,000 800

Dec. Foreign exchange lose 800

31 Firm commitment 800

March Transaction lose (9.48-9.42)x10,000 600

1 Foreign currency payable to exchange dealer 600

March Firm commitment 600

1 Transaction gain 600
March Investment in foreign currency (10,000 x 9.48) 94800
1 Firm commitment ( 800-600) or (9480 - 9420) 200
Sales (10,000 x 9.5) 95000

March FC payable to exchange dealer (95000-800+600) 94800

1 Investment in foreign currency 94800
March Cash 95000
1 Dollar receivable form exchange dealer 95000
THANKS A LOT
See you next time