FINANCIAL ANALYSIS

Financial Analysis

Financial Analysis

Foreign currency translation using direct and indirect rates of exchange

When we talk about the direct rate of exchange, it can be explained as the rate which is normally quoted in terms of domestic currency per unit in regards with the foreign currency of another country or region or union. On the other hand if we talk about the indirect rates of exchange, we will come to know that they are simply the foreign exchange rates which are represented in terms of foreign currency per unit, of a different country or region or union, of the domestic currency of the person or entity dealing in indirect rates of exchange(Goss, B. A., & Yamey, B. S., 1976)

In relation with the aforementioned methods of rates of exchange, the process of foreign currency translation is where the amount of money is expressed in term of another foreign currency. In this process, the whole financial statements of the company and its various projects are translated from one currency to another in order to help the decision making process

Spot and forward rates of exchange

When we talk about forward exchange rate, in simple terms it can be explained as the rate at which usually financial institutions, primarily banks, come into a foreign exchange transaction where they exchange one currency for another currency at a future date. This process is mainly carried out by major multinational corporations, banks and other financial institutions in order to benefit their company or institution with the benefits of forward rate; benefits of hedging. (Bickford, J. L., 2007)

On the other hand when we talk about spot exchange rate, in simple terms it can be explained as the rate at which usually financial institutions, primarily banks, come into a foreign exchange transaction where they exchange one currency for another currency at a current date. This process is also commonly known as benchmark rates or outright rates. In most parts of the world, this process is also known as straight forward rates. If we closely examine the essence on spot exchange, we will come to know that it basically represents the quotations at which the buyer is expecting to exchange a foreign currency at the given time and place. This transaction is different from normal transactions as the normal settling period for normal foreign exchange transactions is 2 days, however in case of spot exchange transaction, it is settled immediately.

Techniques hedging exchange

Hedging techniques are basically used in order to Cover foreign exchange risk is to reduce or cancel the risk of foreign exchange position of the company using internal methods or transferring the risk to external organizations (banks and insurance).

Internal techniques

The choice of invoicing currency

The leads and lags

Indexation clauses in contracts

Internal compensation

Swaps

External techniques

Insurance exchange

Coverage on forward foreign exchange markets

Coverage on the money market

Markets currency options

The forward exchange contracts with participation

These tools to protect against exchange rate risk will not be used uniformly. The choice of a hedging technique over another will be determined based on the advantages and disadvantages of ...