Answered: What are the differences in accounting…

What are the differences in accounting for a forward contract used as a fair value hedge of (a) a foreign currency denominated asset or liability and (b) a foreign currency firm commitment?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter24: Enterprise Risk Management

Section: Chapter Questions

Problem 7MC

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

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What are the differences in accounting for a forward contract used as a fair value hedge of (a) a foreign currency denominated asset or liability and (b) a foreign currency firm commitment?

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What are the differences in accounting for a forward contract used as (a) a cash flow hedge and (b) a fair value hedge of a foreign currency denominated asset or liability?
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