Operational Hedging in International Accounting

INTERNATIONAL ACCOUNTING

Forward Contract
Forwar
d
Contra
ct
Advantages Disadvantages
1. The main advantage of forward
exchange contracts is that they
fix the future rate. In this way,
the downside risk exposure can
be eliminated.
The forward
exchange contracts
are subject to
default risks.
2. The other advantage of forward
exchange contracts is that it
ensures the flexibility in relation
to the amount to be covered.
These contracts can
be difficult to cancel
(Kuzmina &
Kuznetsova, 2018).
3. The forward contracts are
relatively straight forward to
understand.
In the forward
exchange contracts,
it can be difficult to
search the counter
party.

Forwar
d
Contra
ct
Advantages Disadvantages
4. These contracts are very simple
to organize.
These contracts
need tying up
capital.
5. These contracts offer the
complete hedge. There are no
opportunities to
benefits from
favorable movement
in the exchange
rates.
6. They are tailor made. These
contracts may be written for any
period and for any amount.
The main
disadvantage is that
the contractual
commitments are
required to be
completed when it
become payable (in
case of uncertainty,

Forward
contract
Advantages Disadvantages
7. It may be matched
against period of
exposure and for a cash
size of the exposure.
The other
disadvantage of this
contract is
availability.
8. They are over the
counter products.
There is no
intermediate cash
flow prior to
settlement.