Foreign Exchange Transaction Simulator Description
The Foreign Exchange Transaction Simulator is a risk modeling tool that illustrates the economics and accounting of the most common hedging strategies for underlying foreign exchange exposures such as revenues, expenses, receivables, and payables. You can simply input your company specific and foreign exchange market variables, and then select your hedging strategy, which includes not hedging or hedging with a forward contract, vanilla option or zero cost collar.
The resulting output is a highly detailed interactive FX risk analysis that charts the economic payoff of your selected hedging strategy, ranks the alternative hedging strategies, and reports the accounting journal entries and t-accounts with authoritative references to U.S. generally accepted accounting principles (GAAP). Behind the scenes, our robust pricing engine and database simplifies the risk analysis process for you so you can focus on the bottom line impact to your business.
This versatile tool transforms 16 inputs into one information rich analysis in 3 easy steps. The first step is to select (1) the Underlying Exposure and input the related variables of (2) Functional Currency, (3) Foreign Currency, (4) Underlying Notional Amount, (5) Beginning Exchange Rate, (6) Currency Quoting Convention, (7) Start Date, (8) End Date and (9) the Day Count. Step 2 is to select a (10) Hedging Strategy and input the related variables of (11) Hedge Ratio %, (12) Domestic Interest Rate, (13) Foreign Interest Rate, (14) Implied Volatility, and (15) the Collar Range. The third and final step is to forecast (16) the ending exchange rate to see how positive and negative changes in exchange rates impact the cash flow and financial reporting of your selected hedging strategy.
This tool was designed to address a wide variety of FX scenarios, and can be modified efficiently and effectively. For example, if you want to change your underlying exposure or hedge strategy, it’s as simple as one-click. If you want to know which strategy yields the best outcome, all 4 strategies are ranked for you automatically. If you want to see how the default or elective accounting treatment differ, the journal entries and t-accounts are instantly presented side-by-side. This Foreign Exchange Transaction Simulator acts as your own personal quantitative analyst, and puts you in a positions to make a qualified foreign exchange risk management decisions.
Question to Consider
- Would you like to see how a 5-10% favorable or unfavorable change in exchange rates impacts the economics of your hedge strategy?
- Do you know how a forward contract hedge compares to remaining unhedged or using an alternative derivative instrument such as an option or collar?
- Can you pinpoint the exact accounting references that dictates the financial reporting treatment for underlying exposures and derivatives?
- Have you wondered what the debits and credits for your hedge strategy look like and how they impact the Income Statement and Balance Sheet?
- Does your organization want to know the derivative accounting treatment that best aligns with forecasted and booked FX underlying exposures?
- If you are curious about any of these questions, answers can be found using this Foreign Exchange Transaction Simulator.