Advance

CHAPTER 11

MULTINATIONAL ACCOUNTING: FOREIGN CURRENCY TRANSACTIONS AND

FINANCIAL INSTRUMENTS

ANSWERS TO QUESTIONS

Q11-1   Indirect and direct exchange rates differ by which currency is desired to be expressed in another currency. An indirect exchange rate is the number of foreign currency units that may be obtained for one local currency unit. The indirect exchange rate has the foreign currency unit in the numerator. As a fraction, the indirect exchange rate is expressed as follows:

|Number of foreign currency units |

|One local currency unit |

A direct exchange rate is the number of local currency units needed to acquire one foreign currency unit. The direct exchange rate has the local currency units in the numerator (the U.S. dollar for the direct exchange rate for the U.S. dollar). As a fraction, the direct exchange rate is expressed as follows:

|Number of local currency units |

|One foreign currency unit |

The indirect and direct exchange rates are inversely related and both state the same relationship between two currencies.

Q11-2   The direct exchange rate can be calculated by taking the inverse of the indirect exchange rate. Such a computation follows:

|Number of foreign currency units |= |C$1.3623 (Canadian dollars) |

|One local currency unit | |$1.00 (U.S. dollars) |

The inverse of the indirect exchange rate is:

|     $1.00 (U.S. dollars)    ...