Securities regulators around the world have instituted new accounting standards requiring corporations to measure, using a consistent methodology over the life cycle of a hedge, how effective their hedges have been and how effective they are likely to be for hedges. Meeting these standards is an onerous task. It requires a non-spreadsheet solution and access to historical market data.
The Perfect Hedge is designed to provide the necessary calculations for subscribing clients.
Features
1. Derivatives mark to market supported with historical market data
2. Hedge definition and management
3. Prospective and retrospective hedge effectiveness tests for interest rate fair value and cash flow hedges. The following Hedge Types are supported:
- Interest rate fair value hedges where the total risk is hedged
- Interest rate cashflow hedges including a specialized report for variable rate debt
- swapped to fix
- FX fair value hedges
- FX cashflow hedges
4. Generation of accounting entries for hedges
FAS 133/IAS 39/ACG-13
The US, International and Canadian Accounting Standards Boards have articulated similar requirements for corporations to measure hedge effectiveness. The Perfect Hedge has implemented features commonly required by all three standards for affected corporations.
The following guideline endorsed Hedge Effectiveness Testing Methods are supported:
- VaR reduction analysis
- regression analysis
- historical scenario dollar offset analysis
The VaR Reduction Analysis method is performed by calculating the VaR of underlying positions and the VaR of the derivative positions used to hedge. If the VaR is reduced sufficiently the hedge can be expected to perform effectively.
The Regression Analysis method is a preferred method for certain types of cashflow hedges. The system calculates correlation results by regressing two sets of variable rate fixings (for example LIBOR versus a non-benchmark rate). This can be done conveniently, because the system stores necessary histories of rate fixings.
The Historical Scenario Dollar Offset Analysis method is a powerful hedge effectiveness testing tool where the system generates a set of scenarios based on historical price and rate changes where such changes are calculated automatically from the market data stored on the system. For each scenario, the dollar offset changes in the underlying trades are compared with the dollar offset changes in the derivatives. Then the system calculates a correlation result from the set of dollar offset changes as a measure of hedge effectiveness.