Two methods of Foreign Exchange Rate Quotation

Foreign exchange rate is the rate of conversion of one country to another country. Exchange rate depends on countries local demand for other countries. It also depends on their local supplies, the trade’s balance of the countries but also the economic strength of the country.

 Foreign exchange rate

 They are two methods of rate quotation. One method is called direct method and another method is called indirect method. In direct method, the rate is expressed as the number of units of local currency needed to acquire one (1.0) unit of the pertinent rate of currency. Within the U.S., this method is also referred to as quoting exchange rates in American terms.

The indirect method is another rate quotation. In this method, rate is expressed as the number of units of pertinent rate of currency needed to acquire one (1.0) unit of the domestic currency. In the U.S., this method is referred to as quoting the  exchange rate in forex exchange rate terms.

Managing the cash flow impacts which is related to foreign exchange rate exposures can appear daunting. The following steps make this task easier:

  1. Develop a foreign exchange rate policy and procedure. Include many companies goals related to foreign exchange rate management, types of derivatives that can be employed, and personnel authorized to execute transactions.
  2. Prepare a consolidation of subsidiaries’ foreign exchange rate of currency assets and liabilities. The consolidation should result in a natural offset or netting of some of the exchange rate of currency balance sheet exposure. Remaining net consolidated balance sheet positions by exchange rate of currency should represent the exposure that will be per measured due to changes in rates with the impacts recorded in the income statement.
  3. Determine the anticipated annual rate of currency cash flows of each subsidiary. Estimate the total receipts and payments made by each subsidiary in each Forex exchange rate of currency by month for the next 12 months.  Add up the total projected receipts and payables by foreign exchange rate of currency (other than the respective subsidiary’s functional currency) for each subsidiary by month to arrive at the company’s total annual net anticipated foreign exchange rate of exchange rate of currency cash flows.
  4. Develop a strategy to manage consolidated exposure.For foreign exchange rate of currency net balance sheet positions, consider forward contracts in combination with currency swaps selling one currency for another and simultaneously agreeing to exchange the same currencies at a specified time in the future to substantially offset the P&L effects of changes in foreign exchange rate of currency when the balance sheet positions are per measured.
  5. Monitor on an ongoing basis. Periodically review the foreign exchange rate of currency balance sheet positions and update changes in the anticipated foreign exchange rate of currency cash flows by subsidiary. Review monthly income statements and ensure foreign currency gains and losses are reasonable based on identified exposures and derivative contracts in place. If they are not, a foreign currency exposure has likely changed or not been identified, requiring further investigation.

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