Oanda corporation Revision 5

Forex Hedge Accounting Treatment  

OANDA’s FXConsulting 

 

for Corporations

   

17 

 

Other Issues 

The following are some additional points to consider before deciding on the best type of forex product 

for your company. 

Forex Options 

Often, financial institutions will try to sell a company on using currency options or more complex forex 

products to limit downside risk and offer the lure of participating in positive foreign exchange rate 

movements. This flexibility has a cost attached to it, either in the form of an upfront option cost or 

unfavourable foreign currency rates (spreads).  

Here’s how options can work: a company will purchase an option with a cash outlay to buy or sell a 

specified amount of one currency at a specific rate for a certain amount of time.  

  If the rate moves significantly in the company's favor, the option is allowed to lapse (cost 

expensed) and the company can use the current forex market rate to complete the transaction, 

thereby taking advantage of the positive forex price movement (less the cost of the option).  

  If the forex market moves against the company, then it can use the option price to effectively 

convert its asset or liability less the cost of the option. The cost of the option will include the 

time value of the interest differential (or interest carry cost) on the currency pair, a cost 

associated with the expected volatility of the currency pair, and a likely profit for the option 

provider.  

The offer to share in the upside potential comes at a cost. Typically, banks charge an amount above 

their calculated option cost (mark-up) to make up for the fact that option pricing relies on historical 

forex volatility, which is never a precise method of predicting future market prices. Further, since banks 

must manage the risk associated with option pricing, they maximize profit on each transaction.