Final test Flashcards
Independent float
the currency is allowed to fluctuate according to market forces.
Pegged to another currency
the currency’s value is fixed in terms of a particular foreign currency, and the central bank intervenes to maintain the fixed value.
European Monetary System
a common currency (the euro) is used in multiple countries. Its value floats against other world currencies
The difference between the rates at which a bank is willing to buy and sell currency is known as the
“spread”
direct quotes
indicate the number of domestic currency needed to purchase one unit of foreign currency
indirect quotes
indicate the number of foreign currency units that could be purchased with one unit of domestic currency. These rates are simply the inverse of direct quotes.
spot rate
price at which a foreign currency can be purchased or sold today
forwards rate
the price available today at which foreign currency can be purchased or sold in the future
If forward rates exceed spot rates on any given date, the foreign currency is said to be selling at
a premium
If forward rates are less than spot rates, the currency is said to be selling at a
discount
“Put” options allow
for the sale of foreign currency by the option holder.
“Call” options allow for
the purchase of foreign currency by the option holder.
A ________ is the exchange rate at which options will be executed if option holders decide to exercise options
strike piece
intrinsic value is equal to
the gain that could be realized by exercising the option immediately
time value relates to the
spot rate which can change over time and cause the option’s intrinsic value to increase.
Export Sales and import purchases are international transactions, they are components of what is called
trade
The two types of exchange rates are
historical and current
Historical exchange rate
the exchange rate that existed when a transaction occured
current exchange rate
the exchange rate that exist at the balance sheet date
The two major translation methods are
the current rate method or the temporal method
what is a subsdiarys functional currency?
the currency in which the entity primarily generates and expends cash
in comparing the current rate and temporal methods of translation, which of the following is true?
the reported balance of accounts receivable is normally the same under both methods
which of the following statements is true for the translation process using the current rate method
a translation adjustment is created by the change in relative value of a subsidiarys net assets caused by exchange rate fluctuations
at what rates should the equipment and accumulated depreciation-equipment balance sheet accounts be translated, using the current rate method in US dollars?
both current