Hedging fixed rate debt instrument with IRS

Hedging fixed rate debt instrument with IRS

Hypothetical derivative

To calculate the change in the value of the hedged item for the purpose of measuring hedge ineffectiveness, an entity may use a derivative that would have terms that match the critical terms of the hedged item (this is commonly referred to as a ‘hypothetical derivative’), and, for example, for a hedge of a forecast transaction, would be calibrated using the hedged price (or rate) level.

Calculating the change in the value of the hedged item is possible with the help of creating a hypothetical derivative. The way hypothetical derivative is structured is that it replicates the hedged item taking into account, as much as possible, all of the features that are present in the hedged item. The valuation of hypothetical derivative results in the same outcome as that of valuing the hedged item itself. Using a hypothetical derivative is not a method in its own right, but merely a simulated approach to calculate the value of the hedged item. So, it is obvious that a hypothetical derivative cannot be used to include features that exist only in the hedging instrument and not in the hedged item. The change in the value of the hedged item determines selling and hypothetical derivative can be used to assess the hedge effectiveness requirements.

Ind AS Accounting Standards

What is a Cash flow hedge?

Hedges of a net investment in a foreign operation

Treatment of time value /forward points in derivatives

Accounting for the time value of options

Hedge effectiveness requirements

Discontinuance of hedge accounting

Disclosures in respect of hedge accounting

Relationship between components – cash flow hedge

Accounting for net investment hedge – Only functional currency

Illustration of a net investment hedge by a parent entity

Rebalancing by changing the hedge ratio

Are RBI circulars relevant for ECL computation as per Ind AS 109?

Hedging a net position – cash flow hedge

Steps in a cash flow hedge

Equity derivatives and interest rate derivatives

Steps involved in fair value hedge accounting

Accounting for fair value hedge

Hedging instruments and hedged items

Qualifying criteria for hedge accounting

What is meant by Hedging & Hedge Accounting

Equity derivatives and interest rate derivatives

What is a fair value hedge?

Accounting for the forward element

Discontinuation of hedge accounting