Abstract

Showing and Valuation of Forward Exchange and Interest Rate Futures Deals in Bank Balance Sheets — Part III

The present contribution is the last of a three-part analysis of how forward exchange and interest rate futures operations are treated in the annual financial statements of financial institutions. The two preceding contributions already discussed the shortcomings of the relevant bank balance-sheet recording practices and proposed how exchange and interest rate-dependent positions could be taken on the books. This concept initially represented for positions only that must be taken on the books by tradition has now been developed further to take care of pending transactions, especially of futures contracts which are the topic discussed in this contribution.

This paper shows in what way mutually unfulfilled contracts are to be included in the proposed notes on the accounts and explanatory instruments for forward exchange and interest rate risks (foreign currency and fixed-interest rate levels). Moreover, futures contracts and other pending transactions in the narrower sense should be recorded in the balance sheet itself. However, this is no precondition for the applicability of the overall concept. It can also be applied in a modified, but less illustrative way for balance-sheet readers to the present practice of neglecting pending transactions in balance sheets. Finally, profit and loss statement recording problems are discussed, especially in regard of the time of realization as well as of quantification and reporting techniques for unrealized exchange and interest rate gains.