Summary | Course Paper

2/25/2021

1

Advanced Accounting

Thirteenth Edition

Chapter 12

Derivatives and

Foreign Currency:

Concepts and Common

Transactions

Derivatives and Foreign Currency –

Concepts and Common Transactions:

Objectives

12.1 Understand the definition of a derivative and the

types of risks that derivatives can manage.

12.2 Understand the structure, benefits and costs of

options, futures contracts, forward contracts, and

swaps.

12.3 Understand key concepts related to foreign

currency exchange rates, such as indirect and

direct quotes; floating, fixed, and multiple

exchange rates; and spot, current, and historical

exchange rates.

Derivatives and Foreign Currency –

Concepts and Common Transactions:

Objectives

(continued)

12.4 Explain the difference between receivable or

payable measurement and denomination.

12.5 Record foreign currency-denominated

sales/receivables and purchases/payables at the

initial transaction date, period-end, and the

receivable or payable settlement date.

12.1: Derivatives

Derivatives and Foreign Currency: Concepts and Common

Transactions

2/25/2021

Derivative (definition)

The name given to a broad range of financial

securities.

The derivative’s value to the investor is directly

related to fluctuations in price, rate or some other

variable that underlies it.

A derivative can be used to offset (“hedge”) the

potential fluctuation in

❖Interest rates

Using Derivatives as Hedges

A hedge can

–Shift risk of fluctuations in sales prices, costs,

interest rates, or currency exchange rates

–Help manage costs

–Reduce risks to improve financial position

–Produce tax benefits