10.

Derivatives

The Company conducts a large portion of its operations in international markets that subject it to foreign currency fluctuations. The most significant foreign currency exposures occur when revenue and associated accounts receivable are collected in one currency and expenses to generate that revenue are incurred in another currency. The Company’s primary exchange rate exposure relates to payroll, other payroll costs and operating expenses in the Philippines, India, Sri Lanka and Israel.

To manage its exposure to fluctuations in foreign currency exchange rates, the Company entered into foreign currency forward contracts, authorized under Company policies, with counterparties that were highly rated financial institutions. The Company utilized non-deliverable forward contracts expiring within twelve months to reduce its foreign currency risk.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Company does not hold or issue derivatives for trading purposes. All derivatives are recognized at their fair value and classified based on the instrument’s maturity date. The total notional amount for outstanding derivatives as of March 31, 2014 and December 31, 2013 was $15 million and $15.2 million, respectively, which is comprised of cash flow hedges denominated in U.S. dollars.

The following table presents the fair value of derivative instruments included within the condensed consolidated balance sheets as of March 31, 2014 and December 31, 2013 (in thousands):

		Derivatives
	Balance Sheet Location	Fair Value
		2014		2013
Derivatives designated as hedging instruments:

	Prepaid expenses and
Foreign currency forward contracts	other current assets	$	78	$	-

Foreign currency forward contracts	Accrued expenses	$	-	$	577

The effects of foreign currency forward contracts designated as cash flow hedges on the Company’s condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2014 and 2013, respectively, were as follows (in thousands):

	Three months ended
	March 31,
	2014		2013

Net gain recognized in OCI ⁽¹⁾	$	270	$	294
Net loss (gain) reclassified from accumulated OCI into income ⁽²⁾	$	(385)	$	308
Net gain (loss) recognized in income ⁽³⁾	$	—	$	—

⁽¹⁾ Net change in the fair value of the effective portion classified in other comprehensive income ("OCI").

⁽²⁾ Effective portion classified as direct operating costs.

⁽³⁾ There were no ineffective portions for the periods presented.