Foreign Currency Risk

 

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.
• Use Basic Search: Strayer University Online Library to find at least two academic resources. Note: Wikipedia and similar websites are not considered quality references.

This course requires the use of Strayer Writing Standards. For  assistance and information, please refer to the Strayer Writing  Standards link in the left-hand menu of your course. Check with your  professor for any additional instructions.

The specific course learning outcome associated with this assignment:

• Assess the accounting requirements to translate a foreign entity’s financial statements and make sound business decisions.