which one of the following is not associated with forward contracts? course hero

What is foreign currency forward exchange?

A foreign currency forward exchange contract will result in the exchange of currencies (Statement I). Unlike foreign currency option contracts, which give the right (but not an obligation) to exchange currencies, foreign currency forward exchange contracts establish an obligation to exchange currencies.

What is foreign currency transaction?

Either operating transactions (export, import, lending, borrowing, investing, etc.) or forward exchange contract transactions (contracts to exchange currencies) could be foreign currency transactions. A foreign currency transaction occurs when a domestic entity (e.g., U.S. entity) agrees to settle a transaction (pay, receive, exchange, etc.) in a non-domestic (e.g., non-dollar) currency.

What is forward exchange contract?

Forward exchange contracts may be used both to hedge risk and to speculate. When used to hedge risk, the intent is to use the change in value of the forward exchange contract (hedging instrument) to offset, in part at least, an opposite change in value of whatever is being hedged (hedged item). When used to speculate, the forward exchange contract is entered into with the intent of making a profit on the change in its value.

What is the difference between a spot rate and a forward rate?

The difference between the spot rate and the forward rate is the premium (or discount) on the forward contract and must be amortized over the life of the contract as a financing expense, not an exchange gain or loss.

What is foreign currency forward exchange?

A foreign currency forward exchange contract will result in the exchange of currencies (Statement I). Unlike foreign currency option contracts, which give the right (but not an obligation) to exchange currencies, foreign currency forward exchange contracts establish an obligation to exchange currencies.

Does hedging guarantee loss?

B. While the intent of hedging is to mitigate the risk of loss (or gain) attributable to the item being hedged, hedging does not assure that no gain or loss will be incurred on the hedged item. Only in a perfect hedge does no gain or loss occur. In order to be a perfect hedge, the hedging instrument would need to have a 100% inverse correlation to the hedged item. Such an outcome is rare.

Do foreign currency transactions occur only when initiated by a foreign entity?

D. Foreign currency transactions do not occur only when initiated by a foreign entity. A foreign currency transaction occurs when a domestic entity (e.g., U.S. entity) agrees to settle a transaction (pay, receive, exchange, etc.) in a non-domestic (e.g., non-dollar) currency, regardless of whether the transaction is initiated by the domestic entity or the foreign entity.

Do forward contracts require currency exchange?

All forward contracts do not require the exchange of currencies (Statement II). The subject matter of a forward contract may be virtually any asset or liability (e.g. agricultural commodities); they are not limited to the exchange of currencies only.

Is a hedged item a payable?

Because a hedging instrument is intended to offset changes in the hedged item, when the hedged item is a receivable, the hedging instrument would have to be a payable.