12. Derivative Instruments

In the normal course of business, our operations are exposed to fluctuations in foreign currency values and interest rate changes. We may seek to control a portion of these risks through a risk management program that includes the use of derivative instruments.

Foreign Currency Risk Management

The Company utilizes forward foreign currency exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates and minimize credit exposure by limiting counterparties to nationally recognized financial institutions.

As of December 31, 2018, the Company had foreign exchange contracts outstanding of approximately 3.2 million Euro, which will be valid through 2020. At December 31, 2017, the Company had contracts outstanding of approximately 162.5 million Japanese Yen, 24,000 Euro, and 0.2 million Australian Dollars at fixed rates. The contracts outstanding at December 31, 2017 have expired on various dates from January through December 2018.

Interest Rate Risk Management

As discussed in Note 11, Debt, the Company entered into a new term loan to finance the acquisition of True North in May. The loan bears interest at adjusted one-month LIBOR plus a margin ranging between 2% and 2.75% depending on the overall leverage ratio of the Company. As part of our overall risk management policies, in June 2018, the Company entered into a pay-fixed, receive-floating interest rate swap contract with a notional amount of $9.0 million to reduce the impact associated with interest rate fluctuations. The notional value amortizes monthly in equal amounts based on the five-year principal repayment terms. The terms of the swap require the Company to pay interest on the basis of a fixed rate of 3.02%, and GSE will receive interest on the basis of one-month USD-LIBOR-BBA-Bloomberg.

The Company reports all derivatives at fair value. These contracts are recognized as either assets or liabilities, depending upon the derivative’s fair value. The estimated net fair values of the derivative contracts on the consolidated balance sheets are as follows:

	December 31,
(in thousands)	2018			2017

Asset derivatives
Prepaid expenses and other current assets	$	43		$	201
		43			201

Liability derivatives
Other liabilities		(103	)		-
		(103	)		-

Net fair value	$	(60	)	$	201

The Company has not designated the derivative contracts as hedges. The changes in the fair value of the derivative contracts are included in (loss) gain on derivative instruments, net, in the consolidated statements of operations.

The foreign currency denominated contract receivables, billings in excess of revenue earned, and subcontractor accruals that are related to the outstanding foreign exchange contracts are remeasured at the end of each period into the functional currency using the current exchange rate at the end of the period. The gain or loss resulting from such remeasurement is also included in (loss) gain on derivative instruments, net, in the consolidated statements of operations.

For the years ended December 31, 2018 and 2017, the Company recognized a net (loss) gain on its derivative instruments as outlined below:

	Years ended December 31,
(in thousands)	2018			2017

Foreign exchange contracts- change in fair value	$	(150	)	$	73
Interest rate swap - change in fair value		(103	)		-
Remeasurement of related contract receivables and billings in excess of revenue earned		(97	)		26
	$	(350	)	$	99