12. [Foreign currency hedges] Amerada Hess [AHC] reports in its 2001 financial statements that The Corporation uses foreign exchange contracts to re- duce its exposure to fluctuating foreign currency rates, principally the pound sterling. At December 31, 2001, the Corporation has $136 million of notional value foreign currency contracts ($438 million at December 31, 2000). Generally, the Corporation uses these foreign exchange contracts to fix the exchange rate on net monetary liabilt- ties of its North Sea operations [MD&A] The Corporation enters into foreign currency contracts. which are not designated as hedges, and the change in fair value is included in incume currently [Note 14]

a. State and justify whether Amerada's foreign currency con- tracts referred to in the first quotation above are likely to be (1) Long the pound sterling versus the dollar, or (ii) Short the pound sterling versus the dollar

b. Amerada uses the SU.S. as the functional currency for its North Sea operations. Explain why the choice of functional currency is relevant to the accounting impact of AHC's hedg- ing activities.

c. State two reasons that would explain the reduction in the no- tional value of foreign exchange contracts from 2000 to 2001 State which reason is most likely.