HEDGING FORWARD EFFECT ON STOCK VALUES

HEDGING FORWARD EFFECT ON STOCK VALUES

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We contract to purchase stock in USD. Our year end is 31st July .During the year we will hedge the USD against our home currency (Polish Zlotys) for contracted deliveries during August/September/October.

At the year end our auditors say we must take to the Profit & Loss the difference between the cost of the hedged currency and the value of the foreign currency hedged calculated at the year end rate.

eg. We contract to buy $2 mln US at an exchange rate of 3 pln/$1 in April. We have a contract to pay $2mln for goods to be delivered after the year end. The exhange rate at end July is 2.7 pln/$1. The auditors calculate that the cost of $2mln currency at 3 ie. 6 mln pln, but then value the $2mln usd at the year end exchange rate of 2.7 taking a loss of 600,000 pln to the profit & loss account.

Our argument that the hedge instrument is related to cost of stock and that the situation will be reversed the month after the year end when the stock arrives,ie. we would book the stock in at cost to us which would be 6 mln pln is being ignored. We wouldn't book the stock in at 5.4 mln pln as this is below cost or nrv.

We don't want to recognise this loss as it is disorts our results.

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