Discuss why a company might prefer a foreign currency option over a forward contract in hedging a foreign?

In today’s global economy, a great many companies deal in currencies other than their reporting currencies. A. Merchandise may be imported or exported with prices stated in a foreign currency. This situation results in Receivables and payables. Receivables and payables denominated in foreign currency create an exposure to foreign exchange risk.

FASB Statement 133 (as amended by FASB Statement 138) governs the accounting for derivative financial instruments and hedging activities including the use of foreign currency forward contracts and foreign currency options.

Conduct a preliminary search of FASB Statement 133 (as amended by FASB Statement 138) and respond to the following questions:

  1. Discuss the fundamental requirement of SFAS 133 concerning derivatives.
  2. What is meant by the term hedging?
  3. How does a foreign currency forward contract differ from a foreign currency option?
  4. Discuss why a company might prefer a foreign currency option over a forward contract in hedging a foreign?
  5. Discuss whether you will recognize gain or loss from the following different four situations:
    • A U.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates.
    • A U.S. company purchases goods denominated in a foreign currency and the foreign currency appreciates.
    • A U.S. company sells goods denominated in a foreign currency and the foreign currency depreciates.
    • A U.S. company sells goods denominated in a foreign currency and the foreign currency appreciates.

In your own words, post a substantive response to the Discussion Board question(s) and comment on other postings. Your response should address the DB question(s) and move the conversation forward. You will be graded on the quality of your postings, including mastery of the concept as well as critical thinking. If asked for your opinion, do not simply state that it is a good or bad idea; elaborate on your reasons and argument. Include enough detail to substantiate your thinking as well as your position on the questions or comments.

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