Question 1: Explain the difference between indirect and direct exchange rates.
Question 2: What is the direct exchange rate if a U.S. company receives $1.3623 in Canadian currency in exchange for $1.00 in U.S. currency?
Question 3: The U.S. dollar strengthened against the European euro. Will imports from Europe into the United States be more expensive or less expensive in U.S. dollars? Explain.
Question 4: Differentiate between a foreign transaction and a foreign currency transaction. Give an example of each.
Question 5: What types of economic factors affect currency exchange rates? Give an example of a change in an economic factor that results in a weakening of the local currency unit versus a foreign currency unit.
Question 6: How are assets and liabilities denominated in a foreign currency measured on the transaction date? On the balance sheet date?
Question 7: When are foreign currency transaction gains or losses recognized in the financial statements? Where are these gains or losses reported in the financial statements?
Question 8: Sun Company, a U.S. corporation, has an account payable of $200,000 denominated in Canadian dollars. If the direct exchange rate increases, will Sun experience a foreign currency transaction gain or
loss on this payable?
Question 9: What are some ways a U.S. company can manage the risk of changes in the exchange rates for foreign currencies?
Question 10: Distinguish between an exposed net asset position and an exposed net liability position.