Hedge accounting under IAS 39 aims at modifying the normal basis for recognising gains and losses associated with a hedged item or a hedging instrument. This is to enable gains and losses on the hedging instrument to be recognised in profit and loss statement in the same period as off-setting losses and gains on the hedged item. This treatment, however, is only allowed if fair value, cash flow or net investment hedges are highly effective.

 

According to IAS 39 hedge effectiveness must be tested prospectively at both, inception of a new hedging relation, and at each reporting date during the lifecycle of a hedging relation. In addition IAS 39 requires a retrospective hedge effectiveness test also at each reporting date and at maturity of a hedging relation.

 

Hedge effectiveness testing requires the ability to price any financial instrument, be it a hedged item or a hedging instrument, to assess its risk in terms of sensitivity, value-at-risk and volatility of cumulative fair value changes, and finally to compute hedge effectiveness ratios to reveal effective and ineffective portions of a hedge.

 

We execute hedge effectiveness tests for fair value, cash flow and net investment hedges of our clients both, as a one-off and a regular reporting service. The following testing methods are used:

 

Prospective effectiveness tests:

• Monte Carlo Value-at-Risk Reduction Ratio (VaR-RR)
• Monte Carlo Volatility Reduction Ratio (MC-VRR)

 

Retrospective effectiveness tests:

 

• Dollar-offset ratio
• Historical Volatility Reduction Ratio (Historical VRR)

 

To obtain more information, please contact our Prime Services practice under +49 69 505 092 468 or primeservices@maravon.com.

 

 

Also HET is an easy 3-step process.

 

Firstly, clients contact us by phone. In this call a member of our Prime Services-team takes our client's hedging relations, i.e. their types (fair value, cash flow or net investment hedges), their hedged items and their hedging instruments. Then he or she checks whether we are able to provide hedge effectiveness testing for this special request. In case of a 'yes', we immediately send our client an e-mail with both, an offer for the HET, and a checklist for the details we need for the effectiveness test.

 

In a second step, our client sends an e-mail to us, attaching the required details in an Excel-file and term-sheets, if available.

 

Thirdly and last, we set-up a model using the Maravon Analytics Library (MAL), compute the hedge effectiveness test and return an HET-report package to our client.

 

 

 

 

HET clients are sent an HET-report package consisting of an Excel-file and a PDF-file that provide the following information:

 

• Overview of the hedged items, the hedging instruments and their hedging relations (xls)
• Hedge effectiveness ratios for all prospective and retrospective hedging relations (xls)
• Calculation details for all prospective and retrospective hedge effectiveness tests (xls)
• All model inputs, i.e. market rates and parameters (xls)
• A mathematical description of the models used for hedge effectiveness testing (pdf)

 

Please view a demo HET-report by opening the document below.

 

>> Sample Report HET

 

 

Maravon's hedge effectiveness testing capabilities span a wide range of financial and commodity instruments. Please open the following document to obtain a detailed list of the financial and commodity instruments, we currently provide hedge effectiveness testing coverage for.

 

>> Instrument Coverage HET