This preview shows page 1. Sign up to view the full content.
Unformatted text preview: becomes zero. In this case the Boss Corporation has liability exposure (from the import purchase). Here is the basic problem: Accounts payable denominated in a foreign currency. Problem uncertainty surrounding the U.S. dollars needed to buy the foreign currency to settle the obligation. Solution enter into a forward contract today (at the spot rate) to buy the foreign currency needed to settle the obligation. The hedge creates an asset denominated in the foreign currency; which offsets the liability denominated in the foreign currency. Regardless of what happens to the exchange rate between the U.S. dollar and the foreign currency, the corporation has no foreign currency exposure. The will win on of the transaction & loose on the other . The exchange rate gain and losses will cancel each other out....
View Full Document
This note was uploaded on 09/09/2011 for the course TAX 6845 taught by Professor Kelliher,c during the Fall '08 term at University of Central Florida.
- Fall '08