Explanatory Notes
This project is for educational uses only, and is geared towards an audience with average Internet and investing experience. This project shows how web technologies can be adapted to serve the investors of a company. the main focus is on how a company can provide the investor with tools to evaluate foreign currency transactions, without having to use commercial services who offer similar systems at a high price. At the time of this writing no site was found that could calculate past values of foreign currency contracts.
This project was written as a response to the topic "Suggested Aids for Using Emerging Technologies in Measuring and Evaluating Investment Risk." The example contract used is a basic foreign currency exchange contract. The simplicity of the exchange is necessary to illustrate how web technologies can be used. The following paragraphs explain the project and can be consulted while viewing the site. For convenience, print these notes out from the browser. This site is user interactive and will require manual input of values. It is important that all forms are filled in as the user proceeds through the site.
Calculating Current Values
In this section, the viewer reads that an investor finds a foreign exchange contract that the company has entered into. The investor knows that foreign currency exchange rates are not always constant, and so wants to know how much Cafe Import would pay in U.S. dollars to settle the account payable now. The Bloomberg Currency Calculator hyperlink takes the viewer to a web currency calculator on the Bloomberg site. There the viewer inputs the principal amount; in this case, it is 257,200 yen. The viewer should set the home currency to Japanese yen and the amount in U.S. dollars. The viewer is asked to input the answer on the project site. This is for the viewer's benefit and reference.
Calculating Past Values
In this section, the viewer sees a series of forms that together perform a calculation resulting in the past value of the contract. The viewer is asked to go to the site of the Pacific Exchange Rate service to retrieve the March 5 exchange rate. Take note that the viewer is not restricted to finding the rate for March 5. Other dates can be used. At the Pacific site, the base currency should be set to Japanese yen, and U.S. dollars is selected under the Currencies section. After this, click the Retrieve button. Step two on the project site asks for a principal amount (in this example, 257,200) and the March 5 exchange rate. After the numbers have been input, the Calculate button should be clicked to calculate the value. The purpose of this section is to show how a series of inputs similar to these can be added to a company's website to help investors estimate the exchange risk of any similar foreign currency contract.
Hedging With Forwards
In this section, the company is assumed to have entered into a forward contract on the same day as the purchase of the Japanese merchandise in order to offset changes in value due to fluctuating exchange rates. The purpose of this section is to show how the simple calculator used in the previous section can be expanded to calculate contract receivable and payable amounts. The simplicity of the premium/discount calculator required the viewer to enter the calculated contract receivable and contract payable amounts, rounded to the nearest cent. In this example, the result is a premium.
Reported Values
This section shows how Cafe Import would report the foreign exchange contract. The gain or loss at year end (March 31) is calculated after the March 31 spot rate is entered, (found through the Pacific Exchange Rate Service). The spot rate for March 1 is a default value. Next is a portion from the 10-K of Cafe import, depicting a sensitivity analysis as required by the SEC. The company would also disclose its policy of accounting for foreign exchange transactions, which is to use market values.
The company can put the web calculator process to use in a modified sensitivity analysis placed on its site. The modified analysis could also include a box wherein hypothetical exchange rates can be input and the values in the analysis updated accordingly.
Journal Entries
This section is geared towards a viewer interested in seeing the journal entries the company would make. Most of the entries on the project site will update the values as the values are calculated in prior sections. For example, the premium amounts in the amortization of premium entries are updated to reflect the amortization of the premium as calculated in the Hedging with Forwards section. Note that some entries already contain default values. These values are based on the example of the 257,200 yen account payable and were already calculated for the viewer's convenience. If any of the prior sections were not filled with values, the corresponding journal entries will not update.