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When complex basing occurs early in a dynamic uptrend, alternation predicts major price thrusts with few retracements. This CMGI parabolic move supports that theory. Note the extended range at the right shoulder of the Inverse Head and Shoulders pattern, probably driven by inadequate accumulation.

When companies conduct business across borders, they must deal in foreign currencies. Companies must exchange foreign currencies for home currencies when dealing with receivables, and vice versa for payables. This is done at the current exchange rate between the two countries. Foreign exchange risk is the risk that the exchange rate will change unfavorably before payment is made or received in the currency . For example, if a United States company doing business in Japan is compensated in yen, that company has risk associated with fluctuations in the value of the yen versus the United States dollar.[1]

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A hedge is a type of derivative, or a financial instrument, that derives its value from an underlying asset. This concept is important and will be discussed later. Hedging is a way for a company to minimize or eliminate foreign exchange risk. Two common hedges are forward contracts and options.

1 Foreign exchange risk
2 Hedge
3 Accounting for Derivatives
3.1 Under IFRS
3.2 Cash Flow Hedge Example
3.3 Fair Value Hedge Example
3.4 Under US GAAP
4 Do companies hedge?
5 See also
6 References
7 External links
Foreign exchange risk[edit]
Main article: Currency risk

An option sets an exchange rate at which the company may choose to exchange currencies. If the current exchange rate is more favorable, then the company will not exercise this option.[2]

d affect profit or loss”.[5] In other words, a cash flow hedge is designed to eliminate the risk associated with cash transactions that can affect the amounts recorded in net income.

Below is an example of a cash flow hedge for a company purchasing

S $ value FV of contract Change
12/1/Y1 $1.00 $20,000.00 $0.00 $1.04 $20,800.00 $0.00 $0.00
12/31/Y1 $1.05 $21,000.00 $1,000.00 $1.10 $2

A forward contract will lock in an exchange rate today at which the currency transaction will occur at the future date.[2]

Date Spot Rate US $ value Change Fwd. Rate U2,000.00 ($1,176.36) ($1,176.36)
3/2/Y2 $1.12 $22,400.00 $1,400.00 $1.12 $22,400.00 ($1,600.00) ($423.64)
Cash Flow Hedge Example[edit]
12/1/Y1 Inventory $20,000.00 To record pu

Guidelines for accounting for financial derivatives are given under IFRS 7. Under this standard, “an entity shall group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. An entity shall provide sufficient information to permit reconciliation to the line items presented in the balance sheet”.[3] Derivatives should be grouped together on the balance sheet and valuation information should be disclosed in the footnotes. This seems fairly straightforward, but IASB has issued two standards to help further explain this procedure.

The International Accounting Standards IAS 32 and 39 help to g

To adjust value for spot of $1.05
A/P $1,000.00
AOCI $1,000.00 To record a gain on the forward contract
Gain on Forward Contract $1,000.00
Forward Contract $1,176.36 To record the forward contract as an asset
AOCI $1,176.36

Under IFRS[edit]ive further direction for the proper accounting of derivative financial instruments. IAS 32 defines a “financial instrument” as “any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity”.[4] Therefore, a forward contract or option would create a financial asset for one entity and a financial liability for another. The entity required to pay the contract holds a liability, while the entity receiving the contract payment holds an asset. These would be recorded under the appropriate headings on the balance sheet of the respective companies. IAS 39 gives further instruction, stating that the financial derivatives be recorded at fair value on the balance sheet. IAS 39 defines two major types of hedges. The first is a cash flow hedge, defined as: “a hedge of the exposure to variability in cash flows that (i) is attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction, and (ii) coulInventory items in year 1 and making the paym

Premium Expense $266.67 Allocate the fwd contract discount
AOCI $266.67
3/1/Y2 Foreign Exchange Loss $1,400.00 To adjust value for spot of $1.12
A/P $1,400.00
AOCI $1,400.00 To record a gain on the for