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Accounting Ramifications for Forex Options
Using forex options is typically a form of hedging and speculating at the same time, and the results of
the options should be segregated and reported separately. Some companies have treasury departments
that can operate as profit centres, with an ability to make a profit over and above the cost of options or
other types of trades. This ability is directly tied to reliable market information and knowledgeable
staff.
On the other hand, currency options may be appropriate for hedging uncertain future transactions. As
an example, the company may be bidding on a foreign sales contract to supply widgets. To protect itself
from future foreign exchange rate movements before the contract is awarded, the company may
consider entering into a forex option contract to sell a portion of the foreign currency in the future. (The
cost of the forex option may be incorporated into the overall bidding costs.)
By adjusting the strike price on the option, you may be able to lower its upfront cost. The option will
protect the company from extreme foreign currency movements, but it will come at a cost.
Further, by designating the forex option as protecting only the downside risk associated with
fluctuations in foreign currency rates, the forex option may be used for hedging future transactions.
One more note of caution: be careful of exotic foreign currency options or exotic forward type
products. Typically, these products are built with the promise of sharing in positive foreign exchange
rate movements; however, you pay for this cost as it’s typically factored into the forward rate.
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