Foreign Exchange Risk Management And Accounting For Hedging Instruments

This thesis is to study the foreign exchange (FX) risk and accounting for foreign currency transactions and hedging from the viewpoint of an accountant. The thesis covers three topics. The first topic talks about the movements of exchange rates and the operation of financial instruments in the market. The second topic is the selection of FX strategy that mainly depends on the managers' attitude towards risks. The last topic is the accounting issues arising from foreign currency transactions and hedging, we want to know weather the balance sheet could fairly represent the value of foreign currency denominated assets and liabilities and the income statement reflect the FX gains or losses properly.The research method of this thesis includes three means including literature reviews on the FX knowledge, the collection of market data and PRC regulations through the Internet, and the study of accounting standards and its application.The PRC accounting standards of foreign currency translation and hedging foreign exchange risk mostly adopted from the international standards, both of them applied the fair value concept as the base of measurements. As the fair value of foreign monetary assets/liabilities and the derivatives can change over time, this causes adjustments to be made to their carrying value. Under these circumstances, the accounting issues covers two areas, the first one is the treatment of foreign exhchange gains/loss and the second one accounting for derivatives. As to a fair-value hedge, the exchange gains/losses arising from the derivatives and the item being hedged will be offset to each other and the difference will be recognized immediately on the income statement. To the contrary, the difference arising from a designated a cash-flow hedge will be carried on and included in the equity. At the period or year end, the devivatives on hands will be carried on the balance sheet at their fair value.Finally I suggest that our country increases the supply of the financial instruments especially the exchange between the US dollars and Non US dollars in order to give more choice for the foreign investors in the PRC.