FXTalking Shop

Talking Shop: Taking the Pulse on Forward Points in Balance Sheet Hedging Programs

By November 5, 2020 No Comments

Member question: “How do those with balance sheet hedging programs account for forward points—are they included in earnings before interest and taxes (EBIT), below the line, etc.?

  • “We are considering implementing a balance sheet hedging program for net liabilities that are not part of our cash flow hedging program. ​Forward points are a concern since i) they work against us and ii) they may introduce volatility if the hedge is not valued at spot while the underlying exposure is. Any insight you can provide is much appreciated.”

Peer answer 1: “For our balance sheet hedging program, we recently started including them in our budgeting process but only for the one currency (RUB) that’s had a big impact. After they settle, the points are just lumped in in the overall Gain/Loss hitting other income and expenses (OI&E).

  • “We’ll calculate them at the quarter-end to explain the G/L, but just for discussion. Our hedge timing is not perfect, so we suffer from a difference between spot of the hedge and spot of the underlying exposure regardless.”

Peer answer 2: “At my company, all forward points related to our balance sheet programs are recorded to FX OI&E and we do it on a monthly basis.”

Peer answer 3: “Our balance sheet hedge forward points are marked-to-market in OI&E. The underlying remeasurement of the monetary assets and liabilities we’re hedging is booked automatically to OI&E whether we hedge or not, so while the forward points do contribute some volatility, it is much smaller than the volatility of the spot-to-spot remeasurement we’re hedging. We are fortunate in that forward points are income for us, but it hasn’t always been that way and it won’t always be that way.”

Peer answer 4: “We’ll factor in average forward points cost for B/S hedges into our quarterly forecast of B/S remeasurement if material. Our B/S remeasurement and associated hedges used to book to OPEX, but changed geography this year to OI&E as we were making other changes to hedge geography associated with adoption of new hedge accounting guidelines. Volatility from remeasurement is a little better tolerated in OI&E than OPEX.”

Peer answer 5: “Our balance sheet hedging is mostly of liabilities. The hedging results, which includes mismatch and forward points, are recorded in other income. We track separately what the forward points are by currency so that we can back it out to calculate our true mismatch. Forward points have gotten expensive.”

Peer answer 6: “At my company all forward points to OI&E as well, with hedges that average about 3 months tenor. We break down our results monthly to understand them, isolating forward points (as if amortized) vs. the true mark-to-market volatility. We find the market-to-market component quite small.”

Justin Jones

Author Justin Jones

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