DERIVATIVE INSTRUMENTS

6 Months Ended

Jun. 30, 2015

DERIVATIVE INSTRUMENTS

4. DERIVATIVE INSTRUMENTS

The Company has historically used foreign currency forward contracts (“forward contracts”) to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated cash, accounts receivable, and intercompany receivables and payables held by its U.S. operating company.

Effective on April 1, 2015, the Company restructured its operations with its clients based outside the Americas. These clients began transacting with Pegasystems Limited, a United Kingdom (“U.K.”) subsidiary of Pegasystems Inc., which has the British pound as its functional currency. This reorganization resulted in increased cash, accounts receivable, and intercompany receivables and payables held by Pegasystems Limited in currencies other than the British pound. As a result, the Company’s exposure to foreign currency exchange rate fluctuations in the U.S. dollar, the Euro, and the Australian dollar relative to the British pound increased, while its exposure to foreign currency exchange rate fluctuations in the British pound, the Euro, and the Australian dollar relative to the U.S. dollar decreased.

In July 2015, as a result of this operational reorganization, the Company implemented its revised hedging program under which it fully or partially hedges its non-functional currency exposures for Pegasystems Inc. and Pegasystems Limited, utilizing forward contracts with terms not greater than 180 days. The Company executed forward contracts in July 2015 to hedge its exposures to Euro and British pound denominated cash, accounts receivable, and intercompany receivables and payables held by Pegasystems Inc., and to Euro, U.S. dollar, and Australian dollar denominated cash, accounts receivable, and intercompany receivables and payables held by Pegasystems Limited.

The forward contracts utilized by the Company, both prior to March 2014 and under its revised hedging program, are not designated as hedging instruments. As a result, the Company records the fair value of these contracts at the end of each reporting period in its consolidated balance sheet as other current assets for unrealized gains and accrued expenses for unrealized losses, with any fluctuations in the value of these contracts recognized in other income (expense), net, in its consolidated statement of operations. However, the fluctuations in the value of these foreign currency forward contracts partially offset the gains and losses from the remeasurement or settlement of the foreign currency denominated cash, accounts receivable, and intercompany receivables and payables held by Pegasystems Inc. and Pegasystems Limited, thus partly mitigating the volatility.

The Company did not enter into any forward contracts between March 2014 and June 2015, and as of June 30, 2015 and December 31, 2014, the Company did not have any forward contracts outstanding.

During the six months ended June 30, 2014, the Company entered into forward contracts with an aggregate notional value of $87.9 million, and the total change in fair value recorded in other income (expense), net, was $0.5 million.