420 Planning and Forecasting
Express. It reported that “Exchange-rate gains and losses on the term loan are de-
ferred and amortized over the remaining life of the loan as an adjustment to the re-
lated hedge (service) revenue.” Federal Express Inc., annual report, December
1989, 36.
- This example is discussed in “FX Translation—Lyle Shipping’s Losses,” Ac-
countancy,110 (December 1984): 50. Lyle has an economichedge of its dollar
exposure. - See P. Maloney, “Managing Currency Exposure: The Case of Western Min-
ing,” Journal of Applied Corporate Finance,2 (winter 1990): 29–34, for an analysis of
the effectiveness of this natural hedge during the eighties. - Survey data support this view. See G. Bodnar, G. Hayt, and R. Marston, “The
Wharton Survey of Derivatives Usage by U.S. Non-Financial Firms,” Financial Man-
agement,25 (winter 1996): 113–133. - Spot and for ward exchange rates normally differ. These rate differences are
determined primarily by differences in interest rates in the respective countries of
the domestic and foreign currency. - Beckman Coulter Inc., annual report, December 1999, 47.
- An option that is acquired when the spot value for the currency and the
strike price in the option contract are equal is said to have no intrinsic value.How-
ever, such contracts routinely have positive values. The value of an at-the-money
option contract is normally referred to as time value. - A currency option is similar to f light insurance. The option contract (insur-
ance) only pays off if the plane crashes and the policyholder is injured or dies. That
is, there is a gain only if the unfavorable event takes place. However, if the plane does
not crash, the favorable outcome, the policyholder is simply out the amount of the in-
surance (option) premium. - Analog Devices Inc., annual report, December 1999. Information obtained
from Disclosure Inc. - JLG Industries Inc., annual report, July 2000, 23.
- Titan International Inc., annual report, December 1999. Information ob-
tained from Disclosure Inc. - To be technically correct, a gain or loss from the translation of the statements
of a foreign subsidiary does affect other comprehensive income. However, it does not
affect net income, which continues to be the number which both company manage-
ment and other users of financial statements emphasize. - E.I. DuPont de Nemours & Company, annual report, December 1999, 37.
- Ibid., 37.
- However, this hedging by Quaker Oats is not aimed at protecting either earn-
ings or cash f low. Gains and losses from net-investment hedges, along with their off-
setting translation losses and gains, are reported in shareholders’ equity. - Arch Chemicals Inc., annual report, December 1999, 34.
- The equity method is usually employed when a voting stock interest of 20%
or more is held in another company. The investor company recognizes its share of the
investee company earnings or loss, without regard to whether any dividends are re-
ceived. The receipt of dividends is treated as a reduction in the carrying value of the
investment, and not as dividend income.