Oanda corporation Revision 5

Forex Hedge Accounting Treatment  

OANDA’s FXConsulting 

 

for Corporations

   

12 

 

all the required documentation is completed and the counterparty risk is not an issue. Further, both 

hedge effectiveness tests will be compared against the spot market. To simplify the example, we ignore 

the carry interest costs on the hedge transactions because these amounts will be directly recorded to 

earnings.  

Assume the following exchange rates: 

Timing 

USD/SGD 

Hedge Commencement 

1.150 

30 days later (first reporting date) 

1.100 

60 days later (purchase takes place 

and the payment is made) 

1.050 

At commencement, no entries would be required at the initial documentation stage because the fair 

market value (FMV) of the hedges would be nil. 

At 30 days, the FMV of the forex hedges would be: 

 (1.150 - 1.100) X $1,000,000 USD = $50,000 SGD 

$50,000 SGD / 1.100 = $45,454.54 USD. 

The purchase commitment and the future inventory cost would have increased by the same 

$45,454.54 USD. 

At 60 days, the FMV of the forex hedges would be: 

 (1.150 - 1.050) X $1,000,000 USD = 100,000 SGD 

$100,000 SGD / 1.050 = $95,238.09 USD 

The purchase commitment and the future inventory cost would have increased by the same 

$95,238.09 USD over the original value. 

At 70 days, it is assumed the inventory purchased is sold to US customers for USD$1,300,000 

cash.