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Globalization is a continuous process whereby managers become aware of the impact of international activities on their companies. This process takes place in stages that include exporting, licensing joint ventures, wholly owned subsidiaries, and global sourcing. Each stage has implications for the type of accounting information reported.
Using the information you developed in the first submission that is done below, in 2-3 pages, explain ways in which Striking Furs can protect itself against the losses that would arise from a sudden increase in the foreign exchange rate.
Capable Trappers, Ltd Accounts payable (25,000*0.85)
(To record purchase of fur on credit from Capable Trappers, Ltd)
Loss due to foreign exchange rates fluctuations (25,000*0.89)-(25,000*0.85)
Capable Trappers, Ltd Accounts payable
(To record adjustment on the balance of 25,000 Canadian dollar account due to foreign exchange rate fluctuations)
Capable Trappers, Ltd Accounts payable (25,000*0.89)
Profit account (25,000*(0.89-0.87)
(To record payment to Capable Trappers, Ltd while recognizing a gain of 500)
Explain ways in which Striking Furs can protect itself against the losses that would arise from a sudden increase in the foreign exchange rate.
When foreign exchange rates suddenly rise most of the firms in international trade are caught unawares and often experience significant losses. The organization can use two strategies to ensure that the sudden change in the exchange rate to do not result in a loss for the firm. The first method is to look for a currency in the market which has a high-interest rate than the currency used by the organization. The use of the currency with the high-interest rate will ensure that the firm gets more money than the cost inquired due to an increase in the increase of the foreign exchange rate. The second strategy that can be used by the firm is buying undervalued currency. The purchase of the undervalued currency will ensure that the firm gains some value from the exchange that caters for the increased foreign exchange rate.