Foreign Currency Transactions and Hedging Foreign Exchange Risk

These flashcards cover key vocabulary terms related to foreign currency transactions and hedging foreign exchange risk, essential for understanding the lecture material.

Foreign Exchange Market

A global marketplace for exchanging national currencies against one another.

Exchange Rate

The value of one currency expressed in terms of another currency.

Transaction Exposure

The risk that a change in exchange rates will affect the value of a transaction.

Forward Rate

The agreed upon exchange rate for a currency transaction to occur at a future date.

Spot Rate

The current exchange rate at which a currency can be exchanged at this moment.

Option Contract

A financial derivative that gives the holder the right, but not the obligation, to buy or sell an asset at a specified price before a certain date.

Cash Flow Hedge

A hedge against exposure to cash flow variability due to fluctuations in exchange rates.

Fair Value Hedge

A hedge designed to offset potential losses or gains from changes in the fair value of an asset or liability.

Premium (in options)

The price paid for an option contract.

Put Option

An option that gives the holder the right to sell an underlying asset at a specified price.

Call Option

An option that gives the holder the right to buy an underlying asset at a specified price.

Hedge Accounting

An accounting method that aligns the treatment of hedging instruments and their underlying assets or liabilities.

Intrinsic Value (of an option)

The difference between the current price of the underlying asset and the strike price of the option.

Time Value (of an option)

The portion of an option's price that is attributable to the amount of time remaining until expiration.

AOCI (Accumulated Other Comprehensive Income)

An account that includes unrealized gains and losses not included in net income.

Foreign Currency Option

An option that allows for the exchange of currencies at an agreed rate on or before a specified date.