Accounting for Foreign Currency Tranasactions and Hedges April 2015

FOREIGN CURRENCYHEDGES, OPTIONS, FORWARD CONTRACTS

DIRECT QUOTE:

€1 = $x

INDIRECT QUOTE:

$1 = €x

RISK

Seller

Depreciation

FC buys less

Buyer

Appreciation

FC costs more

HOW MANY TRANSACTIONS?

HOW TO REPORT UNREALIZED G/L?

OCI P&L

CASH FLOW HEDGEFOUR STEPS

FOUR STEPS

1.ADJUST

2.ADJUST

3.OFFSET

4.AMORTIZE

FORWARD CONTRACT EXAMPLE

1.Sale 12/1/15 20,000 FCU

2.Spot = $1

3.A/R due 3/1/16

4.Forward Contract @ $1.04

FIRST

Book the sale

FORWARD CONTACT

No entry

YEAR END – spot is +.05

1. Adjust A/R

YEAR END – Forward + .06

2. Adjust the

Forward

YEAR END – Forward VS Spot

3. Offset

YEAR END – Amortize

4. Amortize

COLLECTION

• A – A – O - A• Close A/R• Close contract

FAIR VALUE HEDGETWO STEPS

TWO STEPS

1.ADJUST

2.ADJUST

FIRM COMMITMENTTWO STEPS

TYPES

1.Purchase Orders

2.Sales Orders

TWO ELEMENTS

1.The Commitment

2.The Option

MOVE IN OPPOSITE DIRECTIONS

OPTIONSPUTS AND CALLS

OPTIONS

Puts

Right to

Sell

Call

Right to

Buy

PUT

Strike < Spot is “Out of the Money”

Expire

Strike > Spot is “In the Money”

Exercise

VALUE OF AN OPTION

Time Value

Intrinsic Value

INTRINSIC VALUE

“In the Money”

Options Only

INTRINSIC VALUE

Strike – Spot x

# FCU

EXAMPLE

1.Purch 12/1/15 50,000 FCU

2.Spot = $1

3.A/P Paid 1/31/y2

4.Option Premium@ $.04

FIRST BOOK THE PURCHASES

A/P AND OPTION

FOUR STEPS

1.ADJUST

2.ADJUST – FAIR VALUE

3.OFFSET

4.AMORTIZE – TIME VALUE

BORROWINGSLIABILITIES, ACCRUALS AND INTEREST EXPENSE

LOAN PAYABLE

GAIN OR LOSS ON FLUCTUATION

INTEREST EXPENSE

EXPENSE AT CURRENT SPOT RATE

ACCRUALS

UNREALIZED GAINS AND LOSSES

FOREIGN BORROWING EXAMPLE

1.Borrowed 1,000,000 FCU @ 2%

2.Spot = $0.20

3.Interest Payable Sept

4.Year End is Dec

DATE OF BORROWING

Record at Spot

YEAR END

• Adjust the Loan

• Interest @ Spot

INTEREST PAYMENT

• Loss On Accrual

• Balance @ Spot