Abstract

Showing and Valuating Forward Exchange and Interest Rate Futures Deals in Bank Balance Sheets – Part II

The first part discussed the bases and risks of major forward exchange and interest rate futures deals in terms of banking techniques using them as an example in showing relevant financial presentation practices. This part begins by outlining a concept for presenting risk-bearing commitments involved in forward exchange and interest rate futures deals in credit institutions’ annual financial statements.

It is proposed to separate the results, unrealized because of interest and exchange rate influences, from all unfunded balance sheet-affecting items and to allocate them to separate abstract valuation units, i.e. foreign exchange and/or fixed-interest positions. They are fully subject to the unit account method of valuation; unfunded exchange/interest rate results are valuated for each currency outside the balance sheet in accordance with largely objectivated procedures and offset against balance sheet results and/or profits insofar as the realization rule and the principle of unequal treatment of losses and income so require. The manner in which this is to be done also depends on the technique of showing specific valuation units of individual balance sheet items. In this context, two approaches — the initial and the current price methods – are applied in the discussion of foreign exchange balances. In view of the great importance of exchange and interest rate commitments to banks and in view of the accounting function of annual financial statements, it is proposed to incorporate two special explanatory instruments (foreign exchange and fixed interest positions) in the annex.

For reasons of easier access to the problems, the explanations in the second part of the contribution generalize even further the special aspects stemming from the unfunded nature of futures deals. The third part finally extends the presentation concept to include mutually unfulfilled contracts as well.