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+--- Thread: Hedging foreign currency denominated debt (/showthread.php?tid=10034)
Hedging foreign currency denominated debt - seeking_knowledge - 06-28-2011
Wanted an accounting opinion on a hedging scenario
Company A issues foreign currency debt, the debt interest is fixed.
In order to hedge against the variability of future cashflows (interest payments) due to FX movements, it can go long in forward contracts to buy the foreign ccy at a fixed rate, thereby hedging the FX risk of future cashflows. This will make the compnay eligible to opt for cashflow hedge accounting treatment, where all the fair value movements on the hedging instruments (forward contracts) are deferred in equity until the actual cashflow transactions actually occur.
The above is an accepted way to hedge against exposure to variability in cashflows, but in order to accomplish it, the entity will have to go long on multiple contracts with maturities coinciding with the settlement dates of interest rate payments. This results in high transaction costs.
Now, Scenario 2; The entity decides to hedge the against the present value of the future cashflows(interest payments), by going long in a forward contract whose notional amount is equal to the calculated PV of future cashflows (fixed interest payments). Under this scenario, how do you account for the FV movements in hedging instrument and hedged item. Is this a cashflow hedge or a fair value hedge, need some thoughts on this, preferably with IAS references where applicable.
Thanks
PS I have high hopes that some genius CA will be able to answer me ))