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December 31 - Reporting Period
Assume the US dollar has strengthened over the last 15 days, rising to a EUR/USD rate of
1.4021/1.4022. You now need to record the changes in the fair value of the asset and the forex hedge.
Account
Date
Foreign Currency
Euros – Debit (Credit)
Reporting Currency
US Dollar – Debit (Credit)
Accounts receivable
Dec 31
(6,560.00)
Loss on foreign exchange
Dec 31
6,560.00
Record the reduction in value of accounts receivable ((1.4021 – 1.4677) * 100,000).
Forex hedge (balance sheet) *
Dec 31
6,560.00
Gain on foreign exchange *
Dec 31
(6,560.00)
* The gain in value of the forex hedge (1.4022 – 1.4678). Note: You need to use the buy rate for the
mark-to-market value on the forex hedge as this is the rate that will be used to close it out.
Interest expense **
Dec 31
0.35
Cash (USD) **
Dec 31
(0.35)
** The interest differential on the retail forex platform’s carry spot trade for 16 days:
EUR interest paid (sold currency) = 16/365*4.35%*(100,000) = (190.68)
Convert EUR interest to USD= (190.68) *1.4021= $(267.35) USD
USD interest received (purchased currency) = 16/365*4.15%*(146,770) = $267.00 USD
Net interest expense (267.00 – 267.35) = $(0.35)
In this example, US Gadget has no foreign currency gain or loss on its income statement. Although the
accounts receivable decreased by $6,560, this was offset by the gain in value of the forex hedge,
meaning that US Gadget effectively managed its risk of currency fluctuations. They will record $0.35
in interest expense for the period, which is the interest differential of the forex hedge. The interest
differential will depend on the interest rates of each currency in the pair.
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