Versus value Hedge fx time options intrinsic accounting


FINCAD offers the most transparent solutions in the industry, providing extensive documentation with every product. Accoutning is complemented by an extensive library of white papers, articles and case studies. A hedge with FX or commodity options as the hedging instrument could be treated as either a fair value or cash intrinaic hedge, depending on the risk being hedged. This value may or may not be the same Hedge accounting fx options time versus intrinsic value the current market ttime.

The two components of an option premium are the intrinsic value and time value of the option. The intrinsic value is the diffFX options make up an element of accoubting companies fx risk management strategies. FX options lock in the certainty of worst case exchange rate outcomes while allowing participation in favourable rate movements. In my experience, companies are often reluctant to write out a cheque for the premium so for many the preferred strategy is collar options.

A collar option involves writing, or selling, an fx option simultaneously as buying the fx option in order to reduce premium, often to zero.After transacting the fx option, the challenge comes for those that are hedge accounting and the requirement to split the valuation of accpunting fx option into time value and intrinsic value. IAS 39 allows the intrinsic value of an fx option to be designated in a hedge relationship and can therefore remain on the balance sheet.




Hedge accounting fx options time versus intrinsic value

Versus value Hedge fx time options intrinsic accounting