Understanding Foreign Exchange Risk: An Instructional Simulation Exercise

ABSTRACT

This paper presents an instructional exercise designed to promote the learning of foreign exchange risk and accounting for foreign currency transactions. To promote critical thinking skills, the exercise uses an unstructured problem-solving format. I use the United Kingdom (U.K.) MONOPOLY™ board game to simulate a U.S. company investing in London real estate. Students conduct all transactions, on account, in British Pounds (GBP), maintain journals in U.S. dollars (USD), and prepare financial statements at game-end in USD. The instructor sets the exchange rate at the beginning of the game, changes it mid-game, and then offers a forward contract. The instructor alters the exchange rate again at the end of the game. Students perceived the exercise as effective in understanding foreign exchange risk and in learning the accounting for foreign currency transactions. Content analysis of students' responses about the exercise reveals that the most frequently used words in the comments were “fun” and “learn.”

Keywords: foreign exchange risk, foreign exchange transactions, forward contracts, simulation games, instructional exercise

 

Source : Joyce A. van der Laan Smith (2013) Understanding Foreign Exchange Risk: An Instructional Simulation Exercise. Issues in Accounting Education: February 2013, Vol. 28, No. 1, pp. 181-195.