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