Hedging against foreign currency exchange risk is designed to manage the risk or uncertainty associated with possible changes in exchange rates. Complications in hedging can occur when a forward contract expires before or after contract date causing a rollover contract, which means the future rate is unfixed. Another complication is when a forward contract amount is different than a transaction amount. If the amount is less than the transaction amount it causes partial hedge, if greater than transaction amount you have a part speculative hedge. Hedge on identifiable foreign currency commitment is used to fix or establish the basis of a FC transaction based on exchange rates at the commitment date versus the transaction date. It involves market prices which have been previously determined at the time of the commitment. The commitment is a fair value hedge and must meet specific criteria for special accounting treatment.…
