Month-end Revaluation – Net Spot Position and Forward Position

The calculation of profit or loss on net foreign exchange position is carried out monthly through what is termed as month-end revaluations. A simple but effective method to calculate separately the profit or loss on the spot position and on the forward position currency is outlined below:

Net Spot Position

    The evaluation of the net spot position at the prevailing spot rates is carried out as follows:

i- The outstanding balance of each account in a particular currency, say the US dollar, is listed from foreign currency control ledger ,under the respective heads of "assets" and "liabilities" and the net position arrived at.

ii. if the net position is overbought, the markets spot buying rate is applied at which the net overbought position could be sold in the market. But if the net position is an oversold one the market’s selling rate is applied at which the oversold position could be liquidated.

iii. The local currency value of the net position thus calculated is compared with the book value to assess whether it results in a profit or loss.

iv. If a profit the amount earned is credited to “Income Account-Profit on exchange trading” whereas if a loss ensues the amount is debited to “income Account-Loss on Exchange Trading”.

Forward Position

The evaluation of the net forward position of each currency at the respective forward rates prevailing as at the closing date is carried out as follows:

a. At the monthly closing date the outstanding forward contracts are listed in groups according to the months in which they would mature and the total cheeked with foreign currency control ledger balances of the outstanding forward purchase and sales contracts.

b. The total of each future month’s forward purchases and forward sales are then set off to arrive at the net overbought or net oversold forward positions for that month.

c. The relevant forward rate, prevailing at the closing date, is applied to each month-wise position and the local currency value thus arrived at is compared with the book value at the contracted rates, to assess whether the result is a profit or loss.

The forward profit or loss is then debited to a suspense account known as the “forward revaluation suspense account” and credited to “income account-profit on exchange trading”.

On the next revaluation date, a month later, the foregoing entry is reversed and the new figure arrived at is inserted. Accordingly, the profit or loss on the contracts that mature during the month would have accrued in the Nostro account, while the remaining forward contracts will be revalued as before.

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