Foreign Currency & the Economy

In: Business and Management

Submitted By blaine
Words 2281
Pages 10
Foreign Currency & The Economy
Author: Ashish Ghangrekar

Abstract:
This paper attempts to discuss about the relation between Foreign Currency & the Economy. The paper develops the correlation between foreign currency & the economy. It further goes on to discuss the various parameters that affect this correlation. Finally, a few hypotheses drawn from the discussion are presented at the end of the paper.

Introduction:
Foreign Exchange & foreign currency is the elastic link between various independent political states. The Central Bank of a country frames the monetary policy to maintain a desirable Foreign exchange rate & regulate the flow of foreign currency in an economy.
Now let us understand the correlation & interplay between foreign currency & the various economic parameters. In a floating regime of exchange rates, the interest rates in the country are adjusted so as to vary its real exchange rates & also as a measure to control inflation. Therefore a developing capitalist country will have its Central Bank adopt the policy of keeping its interest rate as low as possible. This will enable the entrepreneurs & the various economic actors to obtain capital at a cheaper rate. It will also help to maintain a low real exchange rate & hence boost domestic exports. Growing exports will see a positive trade balance or a Current Account Surplus. With a current account surplus the country can make strategic investments in the foreign markets or acquire factories. This will result in a negative Capital Account while indicating the presence in foreign markets. Such a cycle when sustained can provide a drive to the economy & increase the country’s GDP & improve the standard of living in it.
The sources in which a foreign currency enters a domestic economy are either by the way of Foreign Direct Investment (FDI) or by the way of Exports. Foreign Reserves can also…...

Similar Documents

Foreign Currency Payments

...A Case Study: How CIGNA Streamlined its Foreign Currency Payments Global Finance CIGNA, an international employee benefits provider, makes cross-border payments by wire, check and ACH to more than 225,000 beneficiaries in over 70 countries. The company wished to simplify and automate its foreign currency payments. Key objectives were to accelerate payment processing time, trim cost and to ensure a superior service to their clients. The Problem: Payment Timing is Critical to Service Quality Typically, producing checks and Explanation of Benefits (EOB) statements (i.e., remittance advices), adds a week or more to processing time in addition to the time for crossborder delivery. But payment timing is of the essence. The payment process must be as effective as if the beneficiary were using a local insurance provider while also reflecting the superior service that CIGNA provides. The Solution: Simple and Seamless Citigroup provided CIGNA with a single solution for all of its cross-border payments. CIGNA uses a direct file-delivery connection to send one payments file to Citigroup covering all of its foreign currency payments. WorldLink® Payment Services handles the rest. Printing and distributing checks with EOB details at Citigroup's regional centers accelerates check payment. Citigroup debits CIGNA's U.S. bank account for an aggregated amount covering the total dollar equivalent of all foreign currency payments. Following payment execution, the bank sends CIGNA one......

Words: 641 - Pages: 3

Foreign Currency

...我国上市公司外汇风险暴露的行业特征研究 ——基于深市行业指数的实证分析 摘要 自2005年7月21日我国汇率形成机制改革以来,人民币持续升值,且波动幅度不断加大,加之中国参与国际贸易的程度不断加深,我国企业的外汇风险暴露问题也日益突出,引起国内外学者的广泛关注。本文结合前人的研究,从行业特征的角度出发,分析汇率波动给不同行业带来的影响有何差异,并结合实际分析造成这种差异的原因。 本文首先对外汇风险暴露的基本概念、分类以及衡量方法进行了理论性的介绍,然后从宏观和微观两个层面分析了企业外汇风险暴露的影响因子,并在此基础上提出了实证分析的基本假设,并利用Jorion的资本市场模型,运用深市行业指数数据,对人民币汇率波动对不同行业指数收益率的影响进行实证分析,结果表明:所选行业中有43%的行业存在着显著的外汇风险暴露,且系数均为正,说明这些行业受到人民币升值的负面冲击;竞争性行业的外汇风险暴露程度显著高于垄断性行业;制造业及其细分行业的外汇风险暴露水平整体高于其他行业,占所有风险暴露显著行业的56%;进口行业从人民币升值中的获益并不明显,出口行业则受到显著的负面冲击。 最后,本文结合我国现实情况分析了我国企业外汇风险暴露的行业特征的成因,发现我国制造业缺乏核心竞争力以及在国际分工中处于弱势地位是导致企业外汇风险暴露出现上述行业特征的主要原因。结合这些成因,本文从企业自身和外部市场条件两个方面提出了相应的对策和建议。 关键词:外汇风险暴露,汇率波动,股票收益,行业特征 Abstract Keywords: Currency exposure, security return, industry characteristics 目录 摘要 2 Abstract 3 1引言 5 1.1研究背景及意义 5 1.2国内外研究现状 6 1.3研究方法与步骤 8 2外汇风险暴露的理论分析 9 2.1外汇风险暴露的基本概念 9 2.2外汇风险暴露的分类 12 2.3外汇风险暴露的一般度量方法 14 2.4外汇风险暴露的影响因素 18 3 我国企业外汇风险暴露的行业特征的实证分析 21 3.1 基本模型和样本的选择 21 3.2 研究假设 22 3.3 实证结果及分析 23 4 结论及建议 25 4.1 研究结论 25 4.2......

Words: 2030 - Pages: 9

Translation of Foreign Currency Financial Statements

...Chapter 8 Translation of foreign Currency financial statements Chapter Outline I. In today's global economy, many companies have invested in operations in foreign countries. A. In preparing consolidated financial statements on a worldwide basis, the foreign currency accounts prepared by foreign operations must be restated into the parent company's reporting currency. B. There are two major issues related to the translation of foreign currency financial statements. 1. Which method should be used? 2. How should the resulting translation adjustment be reported on the consolidated financial statements? C. Translation methods differ on the basis of which accounts are translated at the current exchange rate and which are translated at a historical exchange rate. Translating accounts at the current exchange rate creates a translation adjustment. D. Historically, accountants have experimented with a number of different translation methods. The dominant methods currently in use are the temporal method and the current rate method. E. Translation adjustments can be either (1) reported as a gain or loss in income or (2) deferred in the stockholders' equity section of the balance sheet. II. The primary objective of the temporal method is to maintain the underlying valuation method used by the foreign entity to account for its assets and liabilities. A. Assets and liabilities carried at current or future value are translated at the current......

Words: 16048 - Pages: 65

Chapter 6 - Foreign Currency

...International Accounting, 7/e Frederick D.S. Choi Gary K. Meek Chapter 6: Foreign Currency Ch 6 F i C Translation 1 Learning Objectives        Why do firms translate from one currency to another? What is the difference between a spot forward and swap spot, forward, transaction? What exchange rates are used in the currency translation process and what are their financial statement effects? How does a translation gain or loss differ from a transactions gain or loss? Is there more than one way of translating financial statements from one currency to another? If so, what are they? y , y How does the temporal method of currency translation differ from the current rate method? What is the relationship between currency translation and inflation? 2 1 01/09/2013 Why do Firms Translate?  Facilitates the preparation of consolidated financial statements that allow readers to see the performance of a multinational company s total operations both domestic and company’s foreign. Facilitates the measurement of a firm’s exposure to foreign exchange risk. Facilitates the recording of foreign currency transactions; i.e., f foreign currency sales, purchases, borrowing or lending in the consolidated entity’s reporting currency. Facilitates reporting domestic accounts to foreign audiences-of-interest. 3    Types of Transaction Rates  Spot transactions: the physical exchange of one currency for another in which delivery takes place......

Words: 1772 - Pages: 8

Foreign Currency Transaction

...Foreign Currency Transactions IAS 21 The Effects of Changes in Foreign Exchange Rates AND IAS 39 Financial Instruments: Recognition and Measurement Five Basic Types of Transactions: 1. Non-hedged foreign currency transactions (p.p.523-527)(example provided) • use two transaction approach – record transaction at spot rate (IAS 21.21) and adjust monetary asset or liability to year end spot rate through profit or loss (IAS 21.23) • foreign currency gains/losses will occur throughout the transaction 2. Speculative foreign currency positions (p.p.527-530)(example provided) • occurs when a company is essentially betting that a foreign currency will either appreciate (take a long position) or depreciate (take a short position) • since the transaction is speculative, it is by definition not hedged and hence any gains and losses will be recorded in income • If a forward exchange contract is used, both the receivable and payable to the bank will be recorded in journal entries, but will be netted against each other for financial statement presentation purposes Hedges • Used when there is both a hedged item (i.e. a receivable, payable, future cash inflow or future cash outflow) and a hedging item (forward exchange contract, offsetting loan payable or receivable) • Firms with good borrowing and investing capacity can replicate a forward exchange contract by borrowing and lending in foreign......

Words: 3999 - Pages: 16

Foreign Currency Exchange Rates

...Foreign currency exchange rates . 3/28/2014 Instructor name Student name Foreign currency exchange rates Introduction: Foreign currency exchange rates deals with the study of foreign exchange gains and losses facing companies when they are trading there subsidiaries outside their reporting entity jurisdiction. A reporting entity is an entity which is the principle co of different subsidiaries operating under their control. Subsidiaries are the companies reporting under a principle co whose accounts are consolidated at the end of the reporting entity period. Reporting entity period is the period where the reporting entity accounts are prepared and subsidiaries accounts are prepared according to their reporting period and at the end they are consolidated with the reporting entity accounts so that their accounts give a true and fair view. Now the point is that subsidiaries accounts may be prepared in a different jurisdiction where as the reporting entity accounts are prepared in their home jurisdiction. Subsidiaries must report their accounts in their own jurisdiction currency as well as in the reporting entity jurisdiction currency so that there is fair accounting and the accounts are prepared according to standards. Body: IAS 21 “The Effects of Changes in Foreign Exchange Rates” International accounting standard on foreign currency deals with the study of foreign exchange risks faced by a company. An entity must report their accounts in their home jurisdiction......

Words: 2153 - Pages: 9

Foreign Currency Translation

...functional currency: 4 2. Determine whether the functional currency of the subsidiary is also its home currency. 4 a) If the functional currency is the home currency, 4 b) If the functional currency of the subsidiary is not its home currency, 5 III. Reasons for Translation 5 A. Recording direct business transactions 5 B. Reporting operations conducted through a foreign enterprise 6 C. Measuring the enterprise exposure to the effects of currency fluctuation 7 D. Communicating with foreign audiences-of-interest 7 IV. Financial statement effects of alternative translation rates 7 A. Exchange rates used in translation 7 1. Current rate: 7 2. Historical rate: 7 3. Average rate: 8 B. Risks associated with fluctuations of exchange rates 8 1. Currency transaction risk 9 2. Currency translation risk 9 V. Foreign Currency Translation Methods 9 A. Single rate method 10 1. Current rate method 10 B. Multiple rate method 11 1. Current/noncurrent method 11 2. Monetary/nonmonetary method 11 3. Temporal method 12 VI. Foreign Currency Transactions 13 A. Exchange rate mechanisms 13 1. Independent float: 13 2. Pegged to another currency: 13 3. European monetary system: 13 B. Foreign currency markets 13 1. Exchange Rate 13 2. Types of Exchange rates 14 a) Spot rate: 14 b) Forward rate: 15 c) Swap transaction: 15 C. Hedging foreign exchange risk 16 1. Definition 16 2. Techniques for hedging......

Words: 4613 - Pages: 19

Foreign Currency Risk

...FOREIGN CURRENCY RISK EVALUATION ACC401 With Firm XYZ’s proposed expansion into three new foreign markets there will be several problems that arise. A risk assessment will need to be completed and presented to the board. The following is a risk assessment, with relevant subsequent mitigation measures in the area of foreign currency. Types of Risk There are primarily three types of risk that the firm XYZ faces with the expansion abroad. These are the accounting exposure, transaction exposure and the operating exposure. Accounting exposure, is defined as the exposure that a company faces due to the reduction of its value; as a result of foreign exchange differences between the currency used in the main branch and the currency used in the other country (Gertler, Kiyotaki and Queralto, 2012). Accounting exposure is also referenced as translation exposure. The item most affected by this risk is the balance sheet. This is because the balance sheet is the statement which shows the net worth of a company. Transaction exposure is the risk that a company involved in international trade might incur. Upon entering into an agreement, a company may have to pay higher costs to meet those financial obligations as a result of changes in the foreign exchange. Unlike economic exposure, transaction exposure is well-defined and short-term. Transaction exposure is simply the amount of foreign currency that is receivable or payable. Operating exposure is the risk that a firm with a......

Words: 998 - Pages: 4

Cash Flow Hedge of Foreign Currency Receivable

...Donivan Tan Part A - Cash Flow Hedge of Foreign Currency Receivable 11/1/Y1 Accounts receivable (Pesos) [400,000 x $0.23] $92,000 Sales $92,000 No journal entry for the forward contract. Memo entry. 12/31/Y1 Foreign exchange loss $12,000 Accounts receivable (pesos) [400,000 x ($0.23-$0.20)] $12,000 Forward contract [400,000 x ($0.22-$0.18)] x .9610 $15,376 AOCI $15,376 AOCI $12,000 Gain on forward contract $12,000 Premium Expense [($0.22-$0.23) x 400,000]/3 $1,333.33 AOCI $1,333.33 Impact on Year 1 income: Foreign exchange loss (12,000.00) Gain on forward contract 12,000.00 Premium Expense (1,333.33) Impact on net income (1,333.33) 4/30/Y2 Cash – Foreign currency (pesos) (400,000 x $0.19) $76,000 Foreign exchange currency loss $4,000 Accounts receivable (pesos) [20,000 x ($1.12-$1.05)] $80,000 AOCI [400,000 x ($0.22-$0.19) = $12,000 – $15,376] $3,376 Forward contract $3,376 AOCI $4,000 Gain on forward contract $4,000 Premium Expense [($0.22-$0.23) x 400,000] x 2/3 $2,666.67 AOCI $2,666.67 Cash USD [400,000 x $0.22] $88,000 Forward contract $12,000 Cash - Foreign currency (pesos) $76,000 The impact on net income for Year 2 is: Foreign Exchange Loss $(4,000.00) Gain on Forward Contract $ 4,000.00 Premium Expense (2,666.67) Impact on net......

Words: 722 - Pages: 3

The Us and Iran: Foreign Policy and Economy.

...Lusenko Yulia, Eurasian National University after L.N. Gumilyov The US and Iran: foreign policy and economy. Foreign policy Nowadays, there are no formal diplomatic relations between the Islamic Republic of Iran and the United States of America, instead of exchanging ambassadors, Iran maintains an interests section at the Pakistani Embassy in Washington, D.C., while the United States has maintained a corresponding interests section at the Swiss Embassy in Tehran. Since December 2011, the United States has also maintained a virtual embassy on-line. Historical background. The United States and Iran (then called Persia) established diplomatic relations in 1883. 1979- revolution against the shah.-The United States broke diplomatic relations with Iran in 1980 after a group of revolutionary Iranian students, angered that the deposed Shah has been allowed to enter the United States, seized the U.S. Embassy Tehran and took 52 Americans hostage The United States has long-standing concerns over Iran’s nuclear program, sponsorship of terrorism, and human rights record. The United States and the international community have imposed comprehensive sanctions against Iran to compel Iran to engage seriously in discussions with the international community and address concerns over its nuclear program and human rights abuses. US sanctions against Iran refer to economic, trade, scientific and military sanctions against Iran. On July 14, 2015, the United States, along with China,......

Words: 481 - Pages: 2

Different Treat of Foreign Currency Transaction Between Gaap and Ias

...to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency. [IAS 21.1] The principal issues are which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements. [IAS 21.2] (IASPlus, Deloitte) Key definitions [IAS 21.8] -Functional currency: the currency of the primary economic environment in which the entity operates. (The term 'functional currency' was used in the 2003 revision of IAS 21 in place of 'measurement currency' but with essentially the same meaning.) -Presentation currency: the currency in which financial statements are presented. Exchange difference: the difference resulting from translating a given number of units of one currency into another currency at different exchange rates. -Foreign operation: a subsidiary, associate, joint venture, or branch whose activities are based in a country or currency other than that of the reporting entity. (IASPlus, Deloitte) An entity considers the following factors in determining its functional currency: (a) The currency: (i) that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and (ii) of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services. (b) the currency that......

Words: 2082 - Pages: 9

Foreign Direct Investment and Ireland’s Tiger Economy

...Foreign Direct Investment and Ireland’s Tiger Economy 1) In the economic history of Ireland there have been many changes due to different governments and different policies. The reasons behind the Ireland economic success are the good location of the country, because it’s like a bridge to the European union market for the American companies, low tax, in fact there is a tax rate of 12,5 % that is the lowest in the European Union, a multilingual labor force, that is very important for the multinational enterprise and the labor cost is cheaper than other nations with the same skilled workers like Switzerland and Netherlands and to conclude a very good system of transportation and logistics to move products toward major markets in Europe easily and quickly. In the Ireland economy FDI have played a central role. I would say an essential role for the economy. The lack of the corporate sector has been an active proponent for the Ireland government to attracts FDI, in fact a large part of the Ireland GDP is product by foreign firms, for instance Google, Apple, IBM and so on; this depend on the fact that a huge part of the Ireland work force works in the foreign company. 2) How we can see from the Irish case, a lot of countries during the years started to subsidize foreign direct investments and different firms started an aggressive export oriented strategy. This was led by the large potential profits that this strategy could create: by the host country point of view in fact (as......

Words: 691 - Pages: 3

How China’s Currency Manipulation Affects Us Economy

...How China’s Currency Manipulation Affects US Economy Howe School of Technology Management Principles of Economics How China’s Currency Manipulation Affects US Economy Currency intervention is the action of one or more governments, central banks, or speculators that increases or reduces the value of a particular currency against another currency – this is according to Wikipedia. From January until October in 2010 imports from China to the United States this year were $299,026.0 million and only $72,276.2 million in exports to China, leaving a U.S. trade deficit of -226,749.8 million - this is according to the U.S Census Bureau U.S Foreign Trade Statistics. Here we can examine that Chinese imports to the United States were too high which makes U.S. Gross Domestic Profit (GDP) shrink because imports are subtracted to the Gross Domestic Profit. This trade deficit causes damage to the United States manufacturers and destroys jobs. Chinese products are very attractive because their low labor cost. When U.S. people purchase Chinese manufacturing goods, their manufactures are compensated in dollars which are placed in a United States bank account. Then, the Chinese need to exchange the dollars to Yuan and as a result via their banks they sell the dollars to the Chinese Central Bank which is known as the People’s Bank of China. Given that the U.S trade with China does not balance, the result will be a shortage of the Yuan and a......

Words: 833 - Pages: 4

Ch.10 Translation of Foreign Currency

...Chapter 10 Translation of foreign Currency financial statements Chapter Outline I. In today's global economy, many companies have invested in operations in foreign countries. A. In preparing consolidated financial statements on a worldwide basis, the foreign currency accounts prepared by foreign operations must be restated into the parent company's reporting currency. B. There are two major issues related to the translation of foreign currency financial statements. 1. Which method should be used? 2. How should the resulting translation adjustment be reported on the consolidated financial statements? C. Translation methods differ on the basis of which accounts are translated at the current exchange rate and which are translated at a historical exchange rate. Translating accounts at the current exchange rate creates a translation adjustment. D. Historically, accountants have experimented with a number of different translation methods. The dominant methods currently in use are the temporal method and the current rate method. E. Translation adjustments can be either (1) reported as a gain or loss in income or (2) deferred in the stockholders' equity section of the balance sheet. II. The primary objective of the temporal method is to maintain the underlying valuation method used by the foreign entity to account for its assets and liabilities. A. Assets and liabilities carried at current or future value are translated at the current...

Words: 15066 - Pages: 61

Foreign Direct Investment on Economy

...comprehensive strategy to overcome this problem, which is the main cause of deceleration in the growth momentum of Pakistan’s economy. Due to lack of investor confidence, private investment has reached its lowest point in the recent economic history of the private sector led growth phase (1978 to 2002) in Pakistan. This paper argues that economic as well as non-economic factors are responsible for this declining investment. Economic policies are formulated in such a manner that the short-term objectives of lowering the fiscal and trade deficits were to some extent achieved but overall economic performance and investment were ignored. In order to control external trade deficits, a policy of devaluation increased the cost of production through an increase in prices of imported raw material especially of plant and machinery. Higher real interest rates due to excessive public borrowing that were due to the failure in reducing fiscal deficits has resulted in financial crowding out and has corroded the savings that might be used to finance private investment. The unexplained part of private investment that is not determined by economic factors can be attributed to non-economic factors, which include internal and external shocks. These shocks start from the sanctions which were imposed after the nuclear blast. Events following that initial shock like the freezing of foreign currency accounts, the military coup, the harassment of the partially successful accountability drive of the......

Words: 5689 - Pages: 23