DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 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 six months.

The forward contracts 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 sheets 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 (expense) income, net, in its consolidated statements of operations. The cash flows related to these forward contracts are classified as operating activities in the Company’s consolidated statements of cash flows.

As of September 30, 2015, the total notional amount of the Company’s outstanding forward contracts was $55.7 million. The Company did not have any outstanding forward contracts as of December 31, 2014.

The fair value of the Company’s outstanding forward contracts as of September 30, 2015 was as follows:

(in thousands)	Asset Derivatives				Liability Derivatives
	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Foreign currency forward contracts		Other current assets	$	140		Accrued expenses	$	1,035

The Company entered into forward contracts with notional values as follows:

	Notional Amount
	Three Months Ended September 30,				Nine Months Ended September 30,
Currency (in thousands)	2015		2014		2015		2014
Euro	€	33,309	€	—	€	33,309	€	21,900
British pound	£	10,300	£	—	£	10,300	£	26,500
Australian dollar	A$	27,000	A$	—	A$	27,000	A$	12,900
Indian rupee	Rs	300,000	Rs	—	Rs	300,000	Rs	204,000
United States dollar	$	45,500	$	—	$	45,500	$	—

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2015			2014			2015			2014
Loss from the change in the fair value of forward contracts included in other (expense) income, net	$	(319	)	$	—		$	(319	)	$	(532	)
Foreign currency transaction losses from the remeasurement of foreign currency assets and liabilities	$	(412	)	$	(2,845	)	$	(4,342	)	$	(2,527	)