Hedging Pre-payable Fixed Rate Instruments
Free whitepaper: Hedging Portfolios of Pre-payable Fixed Rate Instruments under International Financial Reporting Standards— prepared by KPMG LLP (Canada)
This paper, 5th in the whitepaper series by KPMG LLP (Canada), details the challenges and best practices when dealing with pre-payment risk. Pre-payment risk means that there is a need to continuously adjust the make-up of the hedging item portfolio, hedge ratio, and/or other features of the relationship in order to continue to effectively mitigate the fair value risk inherent in the hedge item portfolio.
It also explains that the International Financial Reporting Standards (IFRS) allow for the use of a "Portfolio Fair Value Hedge Model", also known as the "Macro Hedge Model", which better accommodates accounting for pre-payment risk.
The paper provides valuable insight into:
- the challenges with hedging a pre-payable portfolios of loans
- the importance of the similarity test when it comes to hedging pre-payable loans
- how the portfolio fair value hedge model works under current international standards