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September 30 - Reporting Period
Assume the USD has fallen over the last 29 days, and by September 30 the USD/CAD exchange rate is
1.0111/1.0114. You now need to record the changes in fair value of the forex hedge.
Account
Date
Foreign Currency
CAD – Debit (Credit)
Reporting Currency
US Dollar – Debit (Credit)
forex hedge (balance sheet)
Sep 30
(3,446.14)
Other comprehensive income
(balance sheet – equity section)
Sep 30
3,446.14
Record the loss in value of the forex hedge:
Calculate the change in the Canadian dollar: ((1.0111 – 1.0254)*243,736= (3,485.42) CDN
Convert the Canadian dollar loss to USD: (3,485.42) /1.0114 = (3,446.14) USD
Note: Use the sell rate for the mark-to-market amount on the forex hedge as this is the rate used to
close out the original forex hedge. On the retail forex platform, the mark-to-market amount is typically
calculated automatically in the currency of your account (your reporting currency).
Interest expense
Sep 30
89.92
Cash (USD)
Sep 30
(89.92)
Record the interest differential of the spot trade on the retail forex platform for 29 days.
CAD interest paid (sold currency) = 29/365*4.55%*(250,000.02) = (903.77) CAD
Convert the CAD interest paid to USD= (903.77) /1.0114= $(893.58) USD
USD interest received (purchased currency) = 29/365*4.15%*243,735.99 = $803.66 USD
Net interest expense $803.66 – $893.58 = $89.92
In this example, US Gadget has no foreign currency gain or loss on its income statement. Although the
value of the future sale to the Canadian customer has increased, this value is offset by the loss in value
of the forex hedge, which is recorded as ―other comprehensive income‖ on its financial statements. US
Gadget has effectively managed the risk of currency fluctuations and would record $89.92 in interest
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