Assignment 2: Foreign Currency Risk Due Week 9 and worth 310 points Albert, CEO of XYZ, Inc., desires to expand the company’s sales through exports to three (3) foreign subsidiaries. Albert knows that the target subsidiaries are located in countries that require transactions to be denominated
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Assignment 2: Foreign Currency Risk
Due Week 9 and worth 310 points

Albert, CEO of XYZ, Inc., desires to expand the company’s sales through exports to three (3) foreign subsidiaries. Albert knows that the target subsidiaries are located in countries that require transactions to be denominated in the local currencies. Albert has researched foreign currency risk and knows that there is accounting exposure in accounting statements, operating exposure in future cash flows, and transaction exposure in outstanding obligations. Albert does not understand how these risks apply to XYZ, Inc. under his proposal or if there are any mitigating risk strategies available. Albert requests you, the head of the Risk Management division, to prepare a report that he can present to the Board of Directors on the potential foreign currency risk if XYZ, Inc. expands sales into these markets. XYZ, Inc.’s reporting currency is the U.S. dollar and the subsidiaries would purchase the merchandise as inventory items.

Note: You may create and / or make all necessary assumptions needed for the completion of this assignment.

Write a three to five (3-5) page paper in which you:

  1. Specify accounting exposure, operating exposure, and transaction exposure. Determine the main financial statement effects of each type of exposure if XYZ, Inc. expands as proposed.
  2. Determine two (2) types of hedges regarding foreign exchange risk, in general, and recommend the most advantageous risk mitigation strategy for XYZ, Inc. Provide support for your rationale. Note: Refer to Chapter 9 of the textbook for more information on corporate strategies regarding hedging foreign exchange risk.
  3. Determine the main accounting assumptions underlying each currently used method (e.g., current rate method and temporal method). Determine the fundamental differences in balance sheet exposure from the application of each method.
  4. Suggest the translation method that XYZ, Inc. should use in order to minimize balance sheet exposure. Provide support for you choice.
  5. Compare the U.S. GAAP approach to the IFRS approach of translating foreign currency financial statements. Determine the main similarities and differences between the two (2) methods of translation. Assuming one (1) of the subsidiaries of XYZ, Inc. is located in a highly inflationary country, determine the appropriate translation method under FASB and provide the theoretical justification for your response.
  6. Use at least two (2) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources.

Your assignment must follow these formatting requirements:

  • Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
  • Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

  • Examine and prepare the accounting entries for intra-entity asset transactions.
  • Examine the impact that specific differences between IFRS and U.S. GAAP have on financial statements.
  • Explain foreign currency transactions and analyze the accounting requirements for the translation of financial statements of foreign entities.
  • Use technology and information resources to research issues in advanced accounting.
  • Write clearly and  concisely about advanced accounting using proper writing mechanics.

Grading for this assignment will be based on answer quality, logic / organization of the paper, and language and writing skills, using the following rubric.

Points: 310 Assignment 2: Foreign Currency Risk
Criteria Unacceptable

Below 60% F

Meets Minimum Expectations

60-69% D

Fair

70-79% C

Proficient

80-89% B

Exemplary

90-100% A

1. Specify accounting exposure, operating exposure, and transaction exposure. Determine the main financial statement effects of each type of exposure if XYZ, Inc. expands as proposed.

Weight: 15%

Did not submit or incompletely specified accounting exposure, operating exposure, and transaction exposure. Did not submit or incompletely determined the main financial statement effects of each type of exposure if XYZ, Inc. expands as proposed. Insufficiently specified accounting exposure, operating exposure, and transaction exposure. Insufficiently determined the main financial statement effects of each type of exposure if XYZ, Inc. expands as proposed. Partially specified accounting exposure, operating exposure, and transaction exposure. Partially determined the main financial statement effects of each type of exposure if XYZ, Inc. expands as proposed. Satisfactorily specified accounting exposure, operating exposure, and transaction exposure. Satisfactorily determined the main financial statement effects of each type of exposure if XYZ, Inc. expands as proposed. Thoroughly specified accounting exposure, operating exposure, and transaction exposure. Thoroughly determined the main financial statement effects of each type of exposure if XYZ, Inc. expands as proposed.
2. Determine two (2) types of hedges regarding foreign exchange risk, in general, and recommend the most advantageous risk mitigation strategy for XYZ, Inc. Provide support for your rationale. Note: Refer to Chapter 9 of the textbook for more information on corporate strategies regarding hedging foreign exchange risk.
Weight: 15%
Did not submit or incompletely determined two (2) types of hedges regarding foreign exchange risk in general, did not submit or incompletely recommended the most advantageous risk mitigation strategy for XYZ, Inc. Did not submit or incompletely provided support for your rationale. Insufficiently determined two (2) types of hedges regarding foreign exchange risk in general, insufficiently recommended the most advantageous risk mitigation strategy for XYZ, Inc. Insufficiently provided support for your rationale. Partially determined two (2) types of hedges regarding foreign exchange risk in general, partially recommended the most advantageous risk mitigation strategy for XYZ, Inc. Partially provided support for your rationale. Satisfactorily determined two (2) types of hedges regarding foreign exchange risk in general, satisfactorily recommended the most advantageous risk mitigation strategy for XYZ, Inc. Satisfactorily provided support for your rationale. Thoroughly determined two (2) types of hedges regarding foreign exchange risk in general, thoroughly recommended the most advantageous risk mitigation strategy for XYZ, Inc. Thoroughly provided support for your rationale.
3. Determine the main accounting assumptions underlying each currently used method (e.g., current rate method and temporal method). Determine the fundamental differences in balance sheet exposure from the application of each method.

Weight: 15%

Did not submit or incompletely determined the main accounting assumptions underlying each currently used method (e.g., current rate method and temporal method). Did not submit or incompletely determined the fundamental differences in balance sheet exposure from the application of each method. Insufficiently determined the main accounting assumptions underlying each currently used method (e.g., current rate method and temporal method). Insufficiently determined the fundamental differences in balance sheet exposure from the application of each method. Partially determined the main accounting assumptions underlying each currently used method (e.g., current rate method and temporal method). Partially determined the fundamental differences in balance sheet exposure from the application of each method. Satisfactorily determined the main accounting assumptions underlying each currently used method (e.g., current rate method and temporal method). Satisfactorily determined the fundamental differences in balance sheet exposure from the application of each method. Thoroughly determined the main accounting assumptions underlying each currently used method (e.g., current rate method and temporal method). Thoroughly determined the fundamental differences in balance sheet exposure from the application of each method.
4. Suggest the translation method that XYZ, Inc. should use in order to minimize balance sheet exposure. Provide support for you choice.

Weight: 10%

Did not submit or incompletely suggested the translation method that XYZ, Inc. should use in order to minimize balance sheet exposure. Did not submit or incompletely provided support for you choice. Insufficiently suggested the translation method that XYZ, Inc. should use in order to minimize balance sheet exposure. Insufficiently provided support for you choice. Partially suggested the translation method that XYZ, Inc. should use in order to minimize balance sheet exposure. Partially provided support for you choice. Satisfactorily suggested the translation method that XYZ, Inc. should use in order to minimize balance sheet exposure. Satisfactorily provided support for you choice. Thoroughly suggested the translation method that XYZ, Inc. should use in order to minimize balance sheet exposure. Thoroughly provided support for you choice.
5. Compare the U.S. GAAP approach to the IFRS approach of translating foreign currency financial statements. Determine the main similarities and differences between the two (2) methods of translation. Assuming one (1) of the subsidiaries of XYZ, Inc. is located in a highly inflationary country, determine the appropriate translation method under FASB and provide the theoretical justification for your response.

Weight: 20%

Did not submit or incompletely compared the U.S. GAAP approach to the IFRS approach of translating foreign currency financial statements. Did not submit or incompletely determined the main similarities and differences between the two (2) methods of translation. Did not submit or incompletely determined the appropriate translation method under FASB and did not submit or incompletely provided the theoretical justification for your response. Insufficiently compared the U.S. GAAP approach to the IFRS approach of translating foreign currency financial statements. Insufficiently determined the main similarities and differences between the two (2) methods of translation. Insufficiently determined the appropriate translation method under FASB and insufficiently provided the theoretical justification for your response. Partially compared the U.S. GAAP approach to the IFRS approach of translating foreign currency financial statements. Partially determined the main similarities and differences between the two (2) methods of translation. Partially determined the appropriate translation method under FASB and partially provided the theoretical justification for your response. Satisfactorily compared the U.S. GAAP approach to the IFRS approach of translating foreign currency financial statements. Satisfactorily determined the main similarities and differences between the two (2) methods of translation. Satisfactorily determined the appropriate translation method under FASB and satisfactorily provided the theoretical justification for your response. Thoroughly compared the U.S. GAAP approach to the IFRS approach of translating foreign currency financial statements. Thoroughly determined the main similarities and differences between the two (2) methods of translation. Thoroughly determined the appropriate translation method under FASB and thoroughly provided the theoretical justification for your response.
6. 2 references

Weight: 5%

No references provided Does not meet the required number of references; all references poor quality choices. Does not meet the required number of references; some references poor quality choices. Meets number of required references; all references high quality choices. Exceeds number of required references; all references high quality choices.
7. Writing Mechanics, Grammar, and Formatting

Weight: 5%

Serious and persistent errors in grammar, spelling, punctuation, or formatting. Numerous errors in grammar, spelling, and punctuation. Partially free of errors in grammar, spelling, punctuation, or formatting. Mostly free of errors in grammar, spelling, punctuation, or formatting. Error free or almost error free grammar, spelling, punctuation, or formatting.
8. Appropriate use of APA in-text citations and reference section (if applicable, might not apply to some 100 level courses such as ACC100)

Weight: 5%

Lack of in-text citations and / or lack of reference section. In-text citations and references are given, but not in APA format. In-text citations and references are provided, but they are only partially formatted correctly in APA style. Most in-text citations and references are provided, and they are generally formatted correctly in APA style. In-text citations and references are error free or almost error free and consistently formatted correctly in APA style.
9. Information Literacy/Integration of Sources

Weight: 5%

Serious errors in the integration of sources, such as intentional or accidental plagiarism, or failure to use in-text citations. Sources are rarely integrated using effective techniques of quoting, paraphrasing, and summarizing. Sources are partially integrated using effective techniques of quoting, paraphrasing, and summarizing. Sources are mostly integrated using effective techniques of quoting, paraphrasing, and summarizing. Sources are consistently integrated using effective techniques of quoting, paraphrasing, and summarizing.
10. Clarity and Coherence of Writing

Weight: 5%

Information is confusing to the reader and fails to include reasons and evidence that logically support ideas. Information is somewhat confusing with not enough reasons and evidence that logically support ideas. Information is partially clear with minimal reasons and evidence that logically support ideas. Information is mostly clear and generally supported with reasons and evidence that logically support ideas. Information is provided in a clear, coherent, and consistent manner with reasons and evidence that logically support ideas.