Foreign Currency Transactions and International Financial Reporting Standards
- Analyze the main reasons why a company might prefer a foreign currency option over a forward contract in hedging a foreign currency firm commitment. In contrast, analyze the main reasons why a company might prefer a forward contract over an option in hedging a foreign currency asset or liability. Determine the option (i.e., a foreign currency option or a forward contract) that you consider to be more effective. Provide a rationale for your response.
- Assume that all the companies in the world use International Financial Reporting Standards (IFRS). Determine at least two (2) obstacles to the worldwide comparability of financial statements, and provide one (1) strategy to overcome the obstacles in question. Provide support for your rationale.
Foreign exchange options, futures contracts and forward contracts are methods of hedging against uncertainties in the changes in the value in foreign currencies. Both have their merits and demerits and one chooses to the strategy they think will best suit them.
The reasons why a company may prefer to use foreign exchange options over Foard contracts are:
Foreign currency options entitles the holder of the option a right but not an obligation – Different from a forward contract which…