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    The effect of derivatives and hedging activities on other comprehensive income. The effect of foreign currency translation on other comprehensive income.

    © BrainMass Inc. brainmass.com December 24, 2021, 9:56 pm ad1c9bdddf
    https://brainmass.com/business/international-finance/foreign-currency-transactions-427143

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    The effect of derivatives and hedging activities on other comprehensive income. The effect of foreign currency translation on other comprehensive income.

    The hedging activity is a position taken up to offset potential losses that may occur because of a business related companion investment. In case of foreign currency, the trader enters into a transaction to protect and existing or anticipated position from unwanted changes in the foreign currency rates. The objective of hedging is to protect the firm from risk of loss. So, the effect of hedging activity on other comprehensive income is twofold. First, the cost of the hedge reduces the comprehension income. Second, the other comprehensive income is protected from losses because of fluctuations. Overall because hedging gives peace of mind to the other businesses, there is an overall improvement in the comprehension. One classic example is that during the early part of this decade, Southwest Airlines hedge against increase in fuel prices. This hedging gave the airlines competitive advantage and comprehensive income increased.

    The derivative is a security whose price is dependent on or derived from one or more underlying assets. The value of the derivative is based on the contract between two or more parties. When a company wants to hedge, it uses forward contract, futures contracts, options and swaps. These are derivatives, and are instruments used for hedging. If a company uses the derivatives to hedge against risk of unfavorable fluctuation, then as explained above there will be a positive effect on the other comprehensive income of the business. However, if the derivatives are used for speculation, the derivatives can lead to losses.

    Foreign currency translation: the conversion of foreign currency into local currency (say US dollars) for reporting in financial statements is called foreign currency translation. There are rules for this translation. The US GAAP the balance sheet items are converted on the date of the balance sheet, and the income statement items are converted at the weighted average rate for that year. If the foreign exchange rate movement is favorable there will be an effect on the income that has been converted. Other comprehensive income will not be affected. Even the effects of gains and losses from the conversion have to be reported in the equity section of the balance sheet separately.

    References:
    www.cbe.uidaho.edu/Acct592/CourseMaterials/.../ForCurrTrans.doc www.bus.iastate.edu/.../translation%20of%20financial%20statements.. www.fasb.org/summary/stsum52.shtml .www.businessdictionary.com/.../foreign-currency-translation-gain-los. www.forextheory.com â?º Money management www.moneymakingforex.com/fullyhedged.htm www.financial-guide.ch/.../derivatives/.../what_are_derivatives/index.. www.capitalmarket.com/MarketBeat/deriv.asp.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 9:56 pm ad1c9bdddf>
    https://brainmass.com/business/international-finance/foreign-currency-transactions-427143

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