Final answer:
An increase in the fair value of a foreign currency forward contract used to hedge fair value exposure is reported as part of Other Comprehensive Income and affects the Accumulated Other Comprehensive Income section of the balance sheet.
Step-by-step explanation:
An increase in the fair value of a foreign currency forward contract used to hedge a fair value exposure of a foreign currency denominated asset or liability is reported as part of Other Comprehensive Income (OCI) and reflected in the equity section of the balance sheet under Accumulated Other Comprehensive Income (AOCI). This is done to match the changes in the value of the hedging instrument with the changes in the value of the hedged item, thereby providing a more accurate reflection of the firm's financial position.
Foreign currency forward contracts are a tool used by firms to hedge against the risk of currency fluctuations. The increase in fair value indicates that the contract is becoming more valuable due to anticipated movements in exchange rates that are favorable to the holder of the contract. By entering into a hedging agreement with a financial institution or brokerage company, a firm can lock in a specific exchange rate for a future date, preserving the value of their foreign currency denominated assets or liabilities against adverse currency movements.