Peru new sol . . . . . . . . . Buku Akuntansi Keuangan Lanjutan
Two columns of information are published for each day’s exchange rates. The first column, in US, indicates the number of U.S. dollars needed to purchase one unit of foreign currency.
These are known as direct quotes. The direct quote for the Swedish krona on March 31 was 0.1217; in other words, 1.0 krona could be purchased with 0.1217. The second column, per
US, indicates the number of foreign currency units that could be purchased with one U.S. dollar. These are called indirect quotes, which are simply the inverse of direct quotes. If
one krona can be purchased with 0.1217, then 8.2169 kroner can be purchased with 1.00. The arithmetic does not always work out perfectly because the direct quotes published in The
Wall Street Journal are carried out to only four decimal points. To avoid confusion, direct quotes are used exclusively in this chapter.
The third column indicates the year-to-date change in the value of each foreign currency. In the three months following January 1, 2009, the Canadian dollar increased in value relative to
the U.S. dollar by 3.6 percent, whereas during the same time period, the Chilean peso de- creased in value by 8.7 percent. Several currencies, such as the Bahraini dinar and the Hong
Kong dollar, did not change in value because they were pegged to the U.S. dollar.
Spot and Forward Rates
Foreign currency trades can be executed on a spot or forward basis. The spot rate is the price at which a foreign currency can be purchased or sold today. In contrast, the forward rate is the
price today at which foreign currency can be purchased or sold sometime in the future. Be- cause many international business transactions take some time to be completed, the ability to
lock in a price today at which foreign currency can be purchased or sold at some future date has definite advantages.
Most of the quotes published in The Wall Street Journal are spot rates. In addition, it publishes forward rates quoted by New York banks for several major currencies British pound, Canadian
dollar, Japanese yen, and Swiss franc on a daily basis. This is only a partial listing of possible forward contracts. A firm and its bank can tailor forward contracts in other currencies and for
other time periods to meet the firm’s needs. Entering into a forward contract has no up-front cost.
The forward rate can exceed the spot rate on a given date, in which case the foreign currency is said to be selling at a premium in the forward market, or the forward rate can be less than the
spot rate, in which case it is selling at a discount. Currencies sell at a premium or a discount be- cause of differences in interest rates between two countries. When the interest rate in the foreign
country exceeds the domestic interest rate, the foreign currency sells at a discount in the forward market. Conversely, if the foreign interest rate is less than the domestic rate, the foreign currency
sells at a premium.
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Forward rates are said to be unbiased predictors of the future spot rate. The spot rate for British pounds on March 31, 2009, indicates that 1 pound could have been
purchased on that date for 1.4347. On the same day, the one-month forward rate was 1.4348. By entering into a forward contract on March 31, it was possible to guarantee that pounds could
be purchased on April 30 at a price of 1.4348, regardless of what the spot rate turned out to be on April 30. Entering into the forward contract to purchase pounds would have been beneficial
if the spot rate on April 30 was more than 1.4348. On the other hand, such a forward contract would have been detrimental if the spot rate was less than 1.4348. In either case, the forward
contract must be honored and pounds must be purchased on April 30 at 1.4348.
As it turned out, the spot rate for pounds on April 30, 2009, was 1.4789, so entering into a one-month forward contract on March 31, 2009, to purchase pounds at 1.4348 would have
resulted in a gain.
Option Contracts
To provide companies more flexibility than exists with a forward contract, a market for foreign currency options has developed. A foreign currency option gives the holder of the option the
right but not the obligation to trade foreign currency in the future. A put option is for the sale of foreign currency by the holder of the option; a call is for the purchase of foreign currency
by the holder of the option. The strike price is the exchange rate at which the option will be
378 Chapter 9
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This relationship is based on the theory of interest rate parity that indicates the difference in national interest rates should be equal to, but opposite in sign to, the forward rate discount or premium. This topic
is covered in detail in international finance textbooks.
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