Forward Contract for Speculation that Foreign Currency 1402

QuickBooks Online 2021 forward contract for speculation that foreign currency will strengthen overview. Let’s get into it within two it’s QuickBooks Online 2021. Here we are in our QuickBooks Online problem to multiple currencies forward contract practice file in the prior presentation, we set up the 30 day free trial. So we can practice with the multiple currencies, which is an advisable step given the fact that once turned on, you can’t turn off the multiple currencies.


Now that we’re in our QuickBooks ism, let’s turn on the multiple currencies by going to the cog up top, we’re going to go then to the accounting and settings or account and Settings, then this is going to be an advanced maneuver. So we’re going to go into the advanced settings here, it’s like a triple backflip that we’re going to pull off with the multiple currencies, by turning them on, we’re going to go into the currencies down below, say the Edit option. And then we’re going to keep our home currency as the US dollar.



If you’re using some other currency, then the same concept will apply just in relation to whatever home currency that you will be using, then I’m going to turn on the multiple currencies that will give us a warning here saying hey, look, this, I’m paraphrasing QuickBooks and saying, hey, look, multiple currencies may be right for you, if you have financial transactions in more than one currency need help deciding about it, you can go to that link, if you want to check into it more.



Once you turn on multiple currencies, you can’t turn it off, they can’t change your home currency, extra fields, columns and more are added to QuickBooks, some features may no longer be available. And we’re going to say I understand. And then we’re going to go ahead and turn it on. So we’re going to turn on the multiple currencies, then I’m going to say done down below done. And then one way we can check this is if we go to our cog up top and take a look at the lists, or you can simply see currencies down here. So this is going to be our list of currencies, we have, by default, these two currencies here. So we’re in the US dollar, that’s our home currency.



And then QuickBooks, by default puts our neighbor here, if you’re in the US currency, being in Canada, because they’re saying, hey, they’re probably doing business with Canada, maybe, and then the euro. So those are going to be common too. But obviously, you can then go up top here and add the other currencies or any other currencies that you may be dealing with, and or, you know, remove these currencies, if you’re if these aren’t the currency that you want to be dealing with. Let’s go on down to the chart of accounts down below on the accounts. Now in a prior presentation, we thought about multiple currencies in terms of just logistically what you’re trying to pay in generally.



And that’s going to be the first thing to kind of think of when you’re dealing with multiple currencies. So if I close the hamburger up top, that means that oftentimes, or it may be the case that if you’re working with someone in another country, say we’re working in Canada, and where the US, then we might have something where we’re going to pay them in Canadian dollars, they might say, hey, look, I’d like to be paid in Canadian dollars, and we’re going to go,



Okay, that’s fine. And that means that we’re going to have a payable that we’re gonna have to make in Canadian dollars. So that means we might need a checking account to hold Canadian dollars, so that when you’re thinking about transactions, you’re typically thinking, Okay, I need a checking account, maybe maybe in Canadian dollars, like me holding on to them so that I could pay things in Canadian dollars if I need to, and then they might possibly be paying us in Canadian dollars. So again, if we’re going to receive something in Canadian dollars, we might need the checking account for that.



And if we’re doing transactions that are accrual based transactions, meaning we sell something and say on account, we sell something, and we expect to be paid later, and we’re going to receive foreign currency dollars save Canadian dollars. Now, we need to track the accounts receivable in foreign currency dollars. And then if we’re going to buy something and promised to pay in foreign currency dollars, then we have to track the accounts payable, and foreign currency dollars.



That’s just logistically, if you’re doing business with a foreign currency, the major types of things that might happen just in the normal course of transactions, then you have speculation type of things that you could be doing on the business as well. When you’re thinking about speculation, you might be doing that speculation more as a hedge, meaning you might be saying, hey, look, I’m doing business, let’s say with a Canadian company, and I’ve got an accounts receivable, that’s kind of significant.



And it’s, it’s owed in Canadian dollars. So I’m exposed now to the risk of the exchange rate that could be between the US and Canadian dollars. And you might set up like a foreign exchange contract to hedge that risk to lower the risk of the the currency transaction, causing a gain or loss due to the fact that the change in a currency exchange rates from the point in time that you have the receivable on the books to the point in time that you pay it.



Now, note that there could be some accounting differences, depending on whether you account for something that’s like a hedge or just simply a speculation type of contract, but the general rule of this of this kind of thing will be similar. So that’s what we’ll basically take a look at now. So you’re basically now saying, or we could do a similar kind of process and just say it’s pure speculation, pure speculation that I think there’s going to be a change, a weakening or strengthening in the foreign currency units compared to our units. And we’re going to try to basically make a play on that and see if we can generate a gain on that.



But again, note, once you have the general concept of basically thinking about how you might speculate, then you can use that same concept to basically mitigate risk for transactions that are in the normal course of business, resulting in accounts payable and receivable in foreign currency transactions exposing us then to risk of currency changes, then we can use these same kind of concepts, basically, to hedge those risks, which again, could result in a little bit of change in the accounting policy.



But we won’t get into that now. But you can look at that in advanced financial accounting, if you want to take a look at more detail on that we have a course on that. So in any case, if we go on over to our practice problem, we’re basically going to speculate in this in this problem, that the foreign currency is going to get stronger. So we’re going to be dealing with Australian dollars, I believe in this practice problem,



and we think the Australian dollars are going to get stronger. So if we were just doing a speculation that type trade, then we might do something like this. So you can imagine a situation where you’re going to set this up with a broker and say, hey, look, I would like a receivable in the future, I’m going to set up a receivable that we’re going to get paid in the future in foreign currency units, in this case, the Australian dollars, and then we’re going to set up a payable and say, in the future, at the same point in time, we’re going to pay you in the US dollars, and therefore this item here, the payable then will be fixed, it’s going to be in our currency.



So it’s not going to fluctuate in on our books, but the receivable will fluctuate. So the receivable now will be subject to changes in the exchange rate. So you might think, then, again, why would the broker do this, the brokers basically going to do this on speculation type of purposes, as well. So these are going to be basically, you know, markets transactions. So if you were to set something up like this, you might then think, Well, what I should do, then what should happen is, I should say,



Well, if I’m going to be having a receivable of the 100,000, in the future, I should take that 100,000 times the current spot rate, and that would be the receivable and the payable, that would be logical to be the case. But because we’re doing this speculation type of type of transaction, the broker is basically going to say, hey, look, we’re not going to base it on the current rate, there’s a market speculation rate in the future. So that’s going to be kind of the change of this transaction, that will happen. In other words, the spot rate for this example, we’re going to say is the point six.



So if I made a sale of inventory or something, and I said that we were going to, we were going to sell it on account, I would use the normal spot rate as we did in the prior transaction. We know what the spot rate is, because on the market of currencies, that’s what it’s actually trading at at this point in time. We don’t know of course, what the forward rate is, because this is going to speculate forward to 331. Sometime we’re imagining in the future, that this will become that this will become do we don’t know what the rate will be obviously, in the future. That’s a speculation.



However, there is a market guessing about what’s going to happen in the future. And so we do have a speculative rate. So at any point in time, until we get to that point in the future, we got this speculative rate. So so that’s what we’re going to have to use. That’s kind of the difference here. So if I was to put this on the books, we’re going to say, Okay, we got the receivable 100,000 that we’re going to get in the future in foreign currency units in Australian dollars, we’re not going to multiply that times the spot rate. But the future rate, the rate, we think the market thinks that it will be at that point in time in the future.



This is why the brokerage house is willing to do it, because they’re just basically providing the service for the market rate, that it’s the speculative rate in the future as opposed to the spot rate. And then the payable then is going to go on the books for the same amount. Now if we have a receivable and payable then on the books, then again, the payable will stay constant. And if we get paid then in the future in foreign currency units, we’re hoping then the Australian dollars, this is basically a bet that the Australian dollars are going to get stronger because if the Australian dollars get stronger, and we get paid 100,000 units of Australian dollars,



we have now got a foreign currency basically exchange gain resulting from that transaction. And so that’s kind of the process that we’ll set up with this foreign currency. So notice if I have it on if I have this, this setup, the for the forward contract will typically look something like this right, we’re gonna have either a receivable or a payable that we’re going to be receiving or pain in foreign units in the future, and then the other side will be in US dollars. And if we’re talking about the receivable side of things being what we’re going to be receiving in foreign currency in the future, we’re basically betting that the foreign currency will get stronger over time.



Now note that you can also think about how this might be used as a hedge meeting. Note what happened. For example, in the normal course of business, I had, I had purchased something on account in foreign currency units in Australian dollars. And I promised to pay an Australian company, say $100,000 in the future in foreign currency units, well, that would that would not be a speculative thing, I was then just doing business and they wanted to be paid in foreign currency.



But I have the same exposure, because now I’ve got, I’ve got foreign currency units that I’m going to promise to pay in. So I’m exposed then now to the risk of the currency changing in relation to the US dollar. So I could then set something up like this to kind of mitigate or reduce the amount of risk that I would have on that. And that’s how you can kind of use this in a practical way, as opposed to just a speculative type of way. But no, when I if I, if that was to happen, when I make the purchase, I would be using the spot rate. So it’s not a perfect kind of hedge, right, because when I make the purchase, I would typically use the spot rate.



And when I put this on the books, I’m using the speculative rate in the future, that’s what the rate, I’m gonna have to use it so those things are aren’t a perfect difference. Again, if you’re setting something up as a hedge, there might be slightly different accounting, that would be taken into consideration. We’re not going to get into that in detail now. But just putting out my the idea of the concept of of a forward contract and how that might be used from a speculative standpoint, and from the standpoint of, of usefulness to mitigate the risk from a business standpoint.



So that’s what we’re gonna have to do. So we’re gonna have to set this up in our system. So we’re gonna have to obviously turn on the foreign currency, we’ll add the Australian dollars so that we can do this transaction in Australian dollars. And then we’re going to have to have some type of receivable that’s going to be in a foreign currency, and then the payable will simply be in the US dollar. So we’ll continue with that next time.

Leave a Reply

Your email address will not be published. Required fields are marked *