Skip to main content
Article

Foreign currency hedging transactions

The Russian ruble collapsed in January 2016 to its lowest level ever.

Legal entities may be exposed to foreign currency fluctuation risk, particularly when a transaction is denominated in a foreign currency.

To mitigate this risk, legal entities can hedge their transactions. The purpose of foreign currency hedging is to offset all or part of any currency fluctuation, and this is generally achieved through the use of derivatives, such as forwards and options.

Forwards

On September 15, 2015, a Russian company (R) entered into a contract with a Finnish company (F) to purchase goods for an agreed price of EUR 1,000,000.

Goods were delivered and ownership of the goods were transferred to R on October 20, 2015, and F received the consideration in EUR on December 15, 2015. The exchange rate effective on October 20, 2015 was RUB 69.7796 for EUR 1.

To mitigate the risk of fluctuations in currency exchange rates between the date of contract and the date of receipt of EU currency, R entered into a forward exchange contract with a bank on September 15, 2015 to purchase EUR 1,000,000 at an exchange rate of RUB 72 for EUR 1. When R entered into the forward exchange contract, it still had to fulfill its obligation to purchase foreign currency in the amount of EUR 1,000,000 payable under the contract between R and F. This contract was settled on December 15, 2015.

On December 15, 2015, F received EUR 1,000,000 from R, and the exchange rate at that time was RUB 76.9659 for EUR 1, while the bank is obliged under the forward exchange contract to sell EUR 1,000,000 EUR to R at an exchange rate of RUB 72 for EUR 1.

Forwards thus allow companies to predetermine the income they will derive from transactions despite exchange rate fluctuations.

Options

On September 15, 2015, a Russian company (R) entered into a contract with a Finnish company (F) to purchase goods for an agreed price of EUR 1,000,000.

Goods were delivered and ownership of the goods were transferred R on October 20, 2015, and F received the consideration in EUR on December 15, 2015. The exchange rate effective on October 20, 2015 was RUB 69.7796 for EUR 1.

To mitigate the risk of fluctuations in currency exchange rates between the date of contract and the date of receipt of EU currency, R entered into a call option contract with a bank on September 15, 2015 conferring the right to purchase EUR 1,000,000 at an exchange rate of RUB 72 for EUR 1. The option premium was set at EUR 10,000, and this contract was settled on December 15, 2015.

On December 15, 2015, F received EUR 1,000,000 from R, and the exchange rate at that time was RUB 76.9659 for EUR 1, while R may exercise its right under the call option contract to buy EUR 1,000,000 from the bank at an exchange rate of RUB 72 for EUR 1.

If the exchange rate effective on December 15, 2015 had been RUB 70 for EUR 1, then R could have decided not to exercise its call option right.

Options thus allow companies to reduce their currency risk to a premium amount.

Accountor is pleased to offer full support in hedging transactions in Russia, in particular, we:

  1. Advise on tax and accounting treatment for hedging transactions;
  2. Recommend financial institutions providing hedging services;
  3. Update for tax and financial purposes accounting policies for hedging instruments;
  4. Prepare forms and paperwork for hedging programs.

Please feel free to contact us:

Share