Forex Hedges

Types of Forex Hedges

All economic hedges aim to manage foreign currency exposure, meaning they are undertaken for the economic aim of reducing potential loss from fluctuations in foreign exchange rates. However, not all hedges are designated for special accounting treatment. Accounting standards enable hedge accounting for three different designated forex hedges: A cash flow hedge may be designated for a highly probable forecasted transaction, a firm commitment (not recorded on the balance sheet), foreign currency cash flows of a recognized asset or liability, or a forecasted intercompany transaction. A fair value hedge may be designated for a firm commitment (not recorded) or foreign currency cash flows of a recognized asset or liability. A net investment hedge may be designated for the net investment in a foreign operation.

Types of Hedged Exposures

Prior to initiating a forex hedge and designating the hedge for special accounting treatment, you will need to capture and evaluate data on the foreign currency exposure, which typically falls into the following categories: foreign currency cash flows of a recognized asset or liability (recorded on the balance sheet), a firm commitment (not recorded on the balance sheet), a highly probable forecasted foreign currency transaction, a forecasted foreign currency intercompany transaction, or the net investment in a foreign operation.

Pip Booker
Chairman & Founder
Booker and Cropper Capital Group