Foreign Currency Hedges Today's economy is incr

Foreign Currency Hedges

Today's economy is increasingly a global one. The majority of large “U.S.” companies are, in truth, multinational companies that may receive only a fraction of their revenues from U.S. operations. Many operations of those companies are located abroad. Foreign operations often are denominated in the currency of the foreign country (the Euro, Japanese yen, Russian rubles, and so on). Even companies without foreign operations sometimes hold investments, issue debt, or conduct other transactions denominated in foreign currencies. As exchange rates change, the dollar equivalent of the foreign currency changes. The possibility of currency rate changes exposes these companies to the risk that some transactions require settlement in a currency other than the entities' functional currency or that foreign operations will require translation adjustments to reported amounts.




A foreign currency hedgeif a derivative is used to hedge the risk that some transactions require settlement in a currency other than the entities' functional currency or that foreign operations will require translation adjustments to reported amounts. can be a hedge of foreign currency exposure of:


•



A firm commitment—treated as a fair value hedge.



An available-for-sale security—treated as a fair value hedge.



A forecasted transaction—treated as a cash flow hedge.


A company's net investment in a foreign operation—the gain or loss is reported in other comprehensive income as part of unrealized gains and losses from foreign currency translation.13