Paper losses may arise from a lot of different transactions that companies enter into. Say for example, a customer paid using a foreign currency as stipulated in the contract, and the company doesn’t have the need for cash yet. When the foreign currency that was paid is a strong currency, the company might opt not to convert at the moment with hopes that the value would continually increase and they would gain in the conversion in a future date. It might be a good thing, if indeed the value of the foreign currency increases. But if it doesn’t, and due to unforeseen events, it drops in value, then the company might suffer considerable amount of losses. Now if this happens, there would still be another decision to make. Should the company convert now to cut down on the losses, or sit and wait, till the value of the currency stabilizes and eventually goes up again? Management would have to consider a lot of things in order to make this decision. It would depend also on the risk tolerance of the company in such matters.

Bottom line, paper losses is very difficult to avoid. For companies, it is advised to enter into futures contract to be able to mitigate the risks involved in having foreign currency transactions in the normal course of their businesses. And if paper loss still arises, it should be taken into consideration, and properly accounted for. A continuously declining foreign currency, especially if it is the main currency that provides majority if not all of the company’s cash flow.