Exposure to exchange gains and losses

If a company generates an exchange gain or loss it means that:

It works with different currencies
It has an exchange rate risk (currency risk)

A company may perfectly work with different currencies without being exposed to an exchange rate risk. All transactions in a foreign currency should be posted in that foreign currency and not in the local currency after conversion at the historical exchange rate. It means that all companies working with different currencies need a separate balance sheet account for each currency.

The exchange contracts usually relate to the following operations:

Multicurrency financings (for example a Belgian financial company financing a Russian company in RUB)
Hedging future flows with financial instruments such as forward contracts or currency options

These transactions are normally (but not exclusively) done with CICC Finance. In some cases (JV companies), they may involve third party bankers.

Concept of exchange position

If the balance sheet in a given currency is not perfectly balanced (total debits = total credits), the difference reflects the exchange position in that currency. The revaluation at month-end rates will generate the exchange gain or loss.

Company at risk
End-of-month rate	1	1.6
	EUR	USD	Revaluation in EUR
Equity	- 1000		-1000
Cash		1400	875
Exchange gain (-) / loss (+)			125
Balance	-1000	1400	0

Company without exchange risk
End-of-month rate	1	1.6
	EUR	USD	Revaluation in EUR
Equity	- 1000		-1000
Customers	500		500
Suppliers	-200	-1400	-1075
Cash	700	1400	1575
Exchange gain (-) / loss (+)			0
Balance	0	0	0

Basic rule: Companies must revalue their foreign currency accounts every month using month-end rates.

Considered transactions: Are covered the following instruments:

forward contracts and options for hedging purposes,
currency swaps for multicurrency financing
- They are not considered as hedging instruments and have nothing to do with the qualification notion.
- A currency swap is a transaction in which a company sells (buys) spot one currency against another and buys (sells) it back forward. The difference between the spot rate and the forward rate of the transaction is due to the interest rate differential between the two currencies.
- They are used for treasury management purposes when there is a need for cash in one currency without being exposed to the exchange risk linked to this currency.

Companies involved: These instructions and principles apply to all companies, though only a limited number of companies are involved in hedging transactions or multicurrency transactions.