Forex Hedge Accounting Treatment
OANDA’s FXConsulting
for Corporations
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USD decline over the next couple of months but maintaining a safe hedge on their receivable. To
minimize downside risk, the company could place a stop loss order on speculative trades to limit
potential loss.
Natural Hedges
The most economical forex hedge is a natural hedge. A natural hedge is where the foreign currency
outflow is offset by a foreign currency inflow. However, the natural hedge may be tricky when the
timing and amounts of the two cash flows do not match.
Scenario (Natural Hedge)
A British company does a great deal of business in the United States, with many American suppliers
and customers. In three months, it has a large shipment worth $10 million USD due to arrive at a US
customer’s factory. By coincidence, a shipment of raw materials is scheduled to arrive in Britain from
the US at the same time, worth $15 million USD. Based on past experience, the company has a high
degree of confidence that it will receive payment from its US customer within 30 days of delivery, so
has timed its payment to its supplier to coincide with this date.
In this scenario, there’s a high probability of a natural hedge of $10 million USD. The company only
needs to hedge a $5 million exposure.
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