Foreign Exchange Risk and Profit Improvement in the Comprehensive Opportunity and Lost Opportunity Control Model
This chapter examines the influence of foreign exchange risks on manufacturing activities and the function of derivatives as a countermeasure against such risk from the viewpoint of management accounting. From this perspective, the chapter examines the Comprehensive Profit Opportunity and Lost Opportunity Control (COLC) model, discussed in the previous chapter, from the viewpoint of financial risk and further its practical development and application. To this end, this chapter first clarifies the actual situations of major Japanese manufacturing companies in terms of foreign exchange fluctuation earnings and derivative instruments (including hedge accounting). Then, after investigation of the prior research on the interrelation between risk management and management accounting, it theoretically analyzes the relations between risks, derivatives, and hedge accounting from the synthetic viewpoint of profit opportunity, risk, and opportunity cost. As a result, this analysis can play an important role in outlining the landscape in which business strategy and enterprise risk management align, both proactively and reflectively, with contemporary management accounting.
KeywordsDerivatives Foreign exchange risk Hedge accounting Internalized improvement
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