Issues on Hedge Effectiveness Testing

Bunea-Bontaş, Cristina Aurora and Petre, Mihaela Cosmina and Culiţă, Gica (2009): Issues on Hedge Effectiveness Testing.

Abstract

The starting point for risk management and hedging lies in understanding a corporation’s exposure to different risks. Hedging is vital for corporate risk management, involving reducing the exposure of the company to particular risks. Hedge effectiveness testing permits firms to assess if they match the timing of the gains and losses of hedged items and their hedging derivatives. In principle, a hedge is highly effective if the changes in fair value or cash flow of the hedged item and the hedging derivative offset each other to a significant extent. This article reviews the concepts of accounting and economic hedging, and presents the requirements for testing the hedge effectiveness.

• Item Type: MPRA Paper
• Language: English
• Keywords: hedge accounting, hedging effectiveness, hedging ineffectiveness, highly effective, effectiveness test
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting

References

1. Akkizidis, I., 2006, Hedge optimization with IAS 39, B&F Banking Solutions, September, www.riskwhoswho.com

2. Bodurtha, J. N., Jr., 2004, Rev. 2005, Divergent FAS-133 and IAS 39 Interest Rate Risk Hedge Effectiveness: Problem and Remedies, http://faculty.msb.edu/bodurthj/research/Divergent_FAS-133_and%20IAS_39_Interest_Rate_Risk_Hedge%20Effectiveness.pdf

3. Capozzoli, A., 2001, What Is FAS 133 Effectiveness and When Does It Matter?, Bank of America Journal of Risk Analysis, February, http://www.gtnews.com/article/2701.cfm

4. Bunea-Bontas, Cristina Aurora, Basic Principles of Hedge Accounting (July 28, 2009). Economy Transdisciplinarity Cognition, 2009. Available at SSRN: http://ssrn.com/

5. Charnes, J. M., Berkman, H., Koch, P., 2002, Measuring Hedge Effectiveness for FAS 133 Compliance, School of Business Working Papers, http://home.business.ku.edu/finance/doc/koch.pdf

6. Coughlan, G., 2004, Corporate risk management in an IAS 39 Framework, JP Morgan,

7. Finnerty, J. D., Grant, D., 2002, Alternative Approaches to Testing Hedge Effectiveness under SFAS No. 133, Accounting Horizons, Vol. 16, http://www.questia.com/googleScholar.qst

8. Finnerty, J. D., Grant, D., 2006, Testing Hedge Effectiveness Under SFAS 133, http://www.nysscpa.org/cpajournal/2003/0403/features/f044003.htm

9. IASB, 2008, International Financial Reporting Standards (IFRSs), including International Accounting Standards (IASs) and Interpretations as approved at 1st January 2008, IASCF, http://books.google.com

10. JP Morgan, 2003, HEAT™: A framework for evaluating hedge effectiveness, http://www.jpmorgan.com/pages/jpmorgan/investbk/heat

11. Keeping, B., 2003, IAS-39 - A Challenge Today, Not Tomorrow - Part Two, Financial Instruments Tax and Accounting Review, July, http://www.gtnews.com/article/5087.cfm

12. Lee, B., 2000, A Consistent Approach to Measuring Hedge Effectiveness, Financial Engineering News, February, http://www.cs.trinity.edu/~rjensen/readings/EffectivenessByBernardLee.htm

13. Lopes, P. T., 2006, Accounting for electricity futures under IAS 39. A report by Faculty of Economics - University of Porto, October, http://www.omip.pt/conteudos/docs/

14. Schraeder, T., Walterscheidt, S., 2009, Hedge Accounting in accordance with IAS 39: Driving force or impediment to economically meaningful risk management?, Corporate Treasury in Germany, http://www.treasury-management.com/articles/4/1/TMIGermany09%20P20%20Hedge.pdf

15. Wallace, J., 2003, Made to Measure, Greenwich Treasury Advisors, April, http://www.gtnews.com/article/4959.cfm

16. Hedge Accounting: IAS 39 & FAS 133, 2004, http://www.gtnews.com/feature/67.cfm

17. www.fasb.org