When to use it
Use it when receipts and payments occur in different currencies or at different dates.
When to be cautious
A current conversion rate is not a hedge or a prediction of settlement rates.
Apply it
Home-currency cost = foreign amount × home currency per foreign unit
State the quote direction. An inverted quote requires division, and the rate date or scenario must be explicit.
- List exposures by currency and settlement period.
- Apply explicit exchange-rate scenarios using consistent quote directions.
- Discuss hedging decisions and authority with the responsible finance function.
An example in practice
Equipment is invoiced in a foreign currency while project funding is domestic. Test the payable under several rates and record which exposure remains open.
Source & credit
Standard financial mathematics; no single inventor is asserted.
OpenStax: Principles of Finance, capital budgeting
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