Oanda corporation Revision 5

Forex Hedge Accounting Treatment  

OANDA’s FXConsulting 

 

for Corporations

   

28 

 

 

Summary – Benefits of Using Spot Trading 

  The actual interest differential is charged—there is no mark-up, unlike forex forwards and forex 

options, which often bury the additional costs or commissions in their rates. 

  There are tight spreads between the sell and buy rates on currency pairs, which lower the costs 

of foreign currency management. 

  There is flexibility in the amount hedged. You are not restricted to hedging specific amounts 

like $100,000. For economic forex hedges (translation risk of known assets/liabilities), it’s easy 

to make adjustments to the net position each month/week. You can either add additional forex 

hedge amounts to the amount outstanding, or close a portion out, to ensure the notional value of 

the forex hedge matches the net foreign currency exposure on the assets or liabilities. 

  There is complete flexibility in the timing of the hedge. If the contract delivery date is earlier or 

later than anticipated, no additional work is required. Conversely, if US Gadget used forex 

forward contracts, they would have had to contact their forex forward provider to sell the 

contract early or extend it (likely at a cost). 

  When using a spot transaction to hedge forex exposure, the dollar offset amount is easy to 

calculate: the change in the value of the future contract equals the change in the value of the 

forex hedge. The interest differential is charged directly to the income statement over the life of 

the forex hedge. In this example, the future sales contract had been signed and the quantity of 

product to be delivered was virtually guaranteed. If the final amount was not completely known, 

US Gadget might choose to designate two different hedging relationships: the first for 50% of 

the contract value and the second for 35% of the contract value. To account for uncertainty, the 

company may decide not to hedge the final 15% of the contract, especially if there's a history of 

fluctuation in final delivery amounts. 

 

 

 

---