Derivative Accounting: Tools & Techniques for Testing Hedge

Effectiveness under FAS 133 & IAS 39

By Tony Awoga CPA, PRM
February 2012
Executive Summary
Companies are generally exposed to market,
credit, liquidity, counterparty and operational risks in
the ordinary course of business. In order to protect
themselves from market vagaries however,
organizations use derivatives to transfer the risk of
changes in market volatilities to third parties.
Derivative is a word that evokes deep emotions
whenever it is mentioned. In fact, it is often viewed like
a dark apparition and despite its intrinsic values and the
critical role that it plays in facilitating liquidity in the
capital market; financial derivative has been unfairly
labeled as a “weapon of mass destruction”.
Notwithstanding its less than stellar reputation
in the court of public opinion however, the use of
derivative as a risk management tool continues to soar.
Advancements in technology, fair value accounting and
deregulation, combined with the ingenuity of
quantitative minds have resulted in a geometric increase
in the use of derivative instruments. This fact, coupled
with dense derivative accounting standards that are
difficult to interpret, makes the process of recording
and reporting derivative transactions inclined to
operational risk, accounting misstatements and
restatements and the attendant public relation
nightmares.
When a company enters into a derivative
transaction, it is required to mark the derivative
instrument to market. However, marking financial
instruments to market and taking changes in the fair
value of such instruments into income makes the
earnings of a company highly vulnerable to market
whims and caprices. Hedge accounting thus gives a
company latitude on how to treat changes in the fair
value of both the derivative instrument and the
underlying item. When a company elects to use hedge
accounting to record its derivative transactions, it has
the freedom to record the changes in the fair value of
such instruments either in income or in a component
of shareholders’ equity known as other comprehensive
income (OCI).
Because of the comparative advantage of using
hedge accounting to manage earnings volatility over the
flexibility of using speculative accounting to record
derivative activities however, the process of recording
derivatives transactions under hedge accounting is not a
walk in the park. Companies that choose to use hedge
accounting to record their transactions are subjected to
stringent accounting and documentation requirements;
including a requirement to test the prospective and
retrospective effectiveness of the hedging arrangements
at every reporting period.
This paper thus seeks to shed some lights on
the tools and techniques available for testing hedge
effectiveness under relevant accounting standards in
order to aid organizations in properly recording and
disclosing their derivatives transactions. It is important
to point out that this paper will focus mainly on hedge
effectiveness testing methodologies and will not
address the entire process of recording derivative
transactions from start to finish. Nonetheless, the
topics covered will form a strong building block for
those interested in further exploring the nuances of
derivatives accounting.

Electronic copy available at: https://ssrn.com/abstract=3041828

Introduction
Organizations enter into derivative
transactions either to speculate or to hedge
exposures to variability in the fair value or cashflow
of their assets and liabilities. A speculation occurs
when a company takes an arbitrage position in
order to take advantage of small price differentials
in the market by simultaneously entering into buy
and sell positions over a very short period of time.
Hedging on the other hand occurs when a
company enters into a derivative transaction in
order to protect its assets from adverse price or
interest rate movements in the market.
All derivative instruments are required to be
marked to market at every reporting period.
However, marking financial instruments to market
and recording the changes in the market value of
such instruments in income may cause fluctuations
in the earnings of a company because the
accounting basis used to record the hedged item
may be different from that used to record the
derivative transaction.
In order to explain why the basis used to
record a derivative instrument may be different
from the basis used record the related underlying
instrument, it is pertinent to briefly refer to
Statement of Financial Accounting Standard 115
(SFAS 115) on the classification of financial
instruments. Per SFAS 115, upon acquisition,
financial instruments are required to be classified
into one of three categories as follows:
 Trading Securities – Debt and equity securities
that are bought and held principally for the
purpose of selling them in the near term are
classified as trading securities and reported at
fair value, with unrealized gains and losses
included in earnings.
 Available-For-Sale – Debt and equity securities
not classified as held-to-maturity or trading
securities and reported at fair value, with
Electronic copy available at: https://ssrn.com/abstract=3041828
unrealized gains and losses excluded from
earnings and reported in a separate component
of shareholders’ equity.
 Held-To-Maturity– Debt securities that the
enterprise has the positive intent and ability to
hold to maturity are classified as held-to-
maturity and reported at amortized cost.
Therefore, using one basis to record a
derivative instrument (marked-to-market at every
reporting period with changes recorded in earnings)
and another basis to record the underlying item
(available-for-sale or amortized cost) may result in a
difference between the economic and the
accounting implications of a derivative transaction
thereby introducing volatility into the earnings of
an entity.
Hedge accounting gives a company latitude
(within certain limits) to record the changes in the
fair value of the derivative instrument in a manner
consistent with the way the underlying item is
normally recorded. However, in order to qualify to
use hedge accounting, a company must comply
with stringent accounting and documentation
requirements; including the requirement to test the
prospective and retrospective effectiveness of the
hedging relationships at every reporting period.
Perhaps, the most challenging element in
the implementation of hedge accounting is the
development of adequate systems and controls to
properly test hedge effectiveness on forward and
backward looking basis. The aim of this paper
therefore, is to discuss the methodologies available
for testing hedging effectiveness under relevant
accounting standards.
What Is A Derivative?
A derivative is a financial instrument that
derives its value from the value of an underlying
item. It can either be a stand-alone contract or it
can be embedded within another contract known as
the host contract. In order for a financial
instrument to be treated as a derivative both
Statement of Financial Accounting Standards 133
(SFAS 133) and International Accounting Standard
39 (IAS 39) specify distinguishing characteristics
that must be present as follows:
 Notional – The financial instrument must
contain one or more underlying or one more
notional amount..
 No Initial Net Settlement – The contract must
require no initial settlement or an initial net
settlement that is smaller than would be
required for other contracts that would be
expected to have similar response to changes in
market factors.
 Net Settlement or Delivery – The contract must
permit the contract to be settled through
payment of cash or provide for the delivery of
an asset that puts the recipient in a position not
substantially different from net settlement.
Common examples of derivative instruments
include options, swaptions, caps/floors/collars,
interest rate swaps, credit default swaps, futures,
forwards and interest rate swaps.
Types of Derivative Accounting
A derivatives transaction can be accounted
for in one of two major ways – speculative
accounting or hedge accounting.
 Speculative/Undesignated: This method
is used where a derivative does not qualify
for hedge accounting or in instances where
a derivative qualifies for hedge accounting
but the entity has decided to use to
speculative accounting. When a company
uses speculative accounting, the derivative
is recognized as an asset or liability and
changes in the fair value of the derivative
are recognized in income at every reporting
period. Companies choose this option over
hedge accounting because of its flexibility
and less onerous accounting requirements.
 Hedge Accounting Method: This
method is used when a company is
concerned about the volatility that the use
of a derivative instrument may introduce
into its earnings. In order to use hedge
accounting method, certain strict criteria
must be met. The criteria are as follows:
o The risk management objective of
the hedging relationship must be
documented in detail.
o The hedge must be expected to be
highly effective in offsetting the
variability in the fair value or
cashflow of the underlying
o For cashflow hedges, the forecasted
transaction must be highly
probable.
o The effectiveness of the hedge must
be measured reliably and accurately.
o The effectiveness of the hedging
relationship must be deemed to be
effective on prospective and
retrospective basis.
o The methods that will be used for
assessing hedge effectiveness must
also be documented. The same
methods must be used for similar
classes of assets to ensure
consistency.
Hedge accounting is further divided
into three main buckets namely (i) fair value
hedge (ii) cashflow hedge and (iii) foreign
currency hedge.
o Fair Value Hedge: This type of
hedge is used to mitigate losses that
 may arise from exposure to changes
in the fair value of an underlying
item. Under this type of hedge,
both the changes in the fair value of
the derivative and that of the
underlying are reported in income.
o Cashflow Hedge: Cashflow hedge
is used to reduce the variability of
the cashflow of an underlying item,
for example, a forecasted
transaction or a firm commitment.
Under this type of hedge, the
effective portion of the change in
the fair value or cashflow of the
underlying is recorded in a
component of shareholders’ equity
known as Other Comprehensive
Income (OCI) and the ineffective
portion is recorded in income. The
amounts recorded in OCI are
reclassified to earnings when the
transaction affects income, for
instance, when the underlying raw
material are converted to finished
goods and sold.
o Foreign Currency Hedge: This
type of hedge is used to hedge
exposures to adverse movements in
foreign currency transactions. An
example is a net investment hedge
used to hedge foreign currency
exposure arising from the reporting
entity’s interest in a foreign
subsidiary. Under this type of
hedge, the effective portion of the
change in the fair value or cashflow
of the underlying is recorded in a
component of shareholders’ equity
known as Other Comprehensive
Income (OCI) and the ineffective
portion is recorded in income. In
addition, changes in exchange rate
are also recorded in equity and
transferred to income when the
transaction affects earnings e.g. on
disposal of the underlying or
conversion of the underlying raw
material to finished goods.
Effectiveness Testing
A key requirement for using hedge
accounting is accurate and reliable effectiveness
testing. Effectiveness is simply the extent to which
changes in the fair value or cashflow of the hedged
item are offset by changes in the fair value or
cashflow of the derivative. Both FAS 133 and IAS
39 require the effectiveness tests to be performed
on a prospective and retrospective basis.
Prospective Test
A prospective test is required to be
performed at inception and at every reporting
period (quarterly for quoted companies) to
establish that the hedging arrangement will be
effective on a forward looking basis. If a hedging
arrangement does not pass the prospective test at
inception, an organization is not allowed to use
hedge accounting. Also, hedge accounting should
be discontinued if the prospective test is failed at a
point in time after inception. The following are the
methods available for testing hedge effectiveness
on a prospective basis.
 Regression Analysis
 Critical Terms Method
 Scenario Analysis Method (Monte Carlo)
 Volatility Risk Reduction Method
 Short-Cut Method (Not allowed under IAS
39)
Retrospective Test
A retrospective test is used to establish that
the hedging arrangement has indeed been effective
in the since the last test was performed. This
approach is similar to back-testing the performance
of a portfolio in prior periods to validate that the
profit or loss generated by the portfolio is in line
with expectations. If a hedging arrangement fails
retrospective effectiveness, then hedge accounting
has to be discontinued. The following methods are
available for retrospective testing:
  Ratio Analysis or Dollar-Offset Method illustration, in a real life situation, thirty (30) to
 Regression Analysis forty (40) data points are considered reasonable.
 Volatility Risk Reduction Method. Also the more the data points used, the less likely
 Short-Cut Method (Not allowed under IAS the analysis will fail the effectiveness test because
39).
more data points tends to smoothen out spikes in
Effectiveness Testing Methodologies market volatilities.
Now that we have established sufficient Changes in Fair Value of Derivative and
background on effectiveness testing approaches in Hedged Item.
general, it is imperative to now explore the specific Period Derivative - ∆ Hedged Item
tools available for performing the tests: -∆
Regression Analysis:
01/01/Y1 0 0
This method is usually used to test
Y1Q1 500 -600
effectiveness on a prospective basis using historical
data. The regression equation attempts to establish Y1Q2 800 -800
a relationship between two variables known as the Y1Q3 -2500 2800
independent and dependent variables. It seeks to
Y1Q4 -1000 900
predict future correlation between two variables
based on what has happened in the past. Y2Q1 2000 -2200
According to this method, if two variables have Y2Q2 -1000 1000
been correlated in the past, then there is a high
expectation that they will be correlated in the future. Y2Q3 -500 3000

The following are the steps for Y2Q4 2440 -2000

implementing this process: Y3Q1 1000 -3000
(i) Determine the simulation period. Y3Q2 -3400 3000
(ii) Within the simulation period determine
the reporting period (quarterly for Y3Q3 2000 -2000
entities subject to SEC reporting).
(iii) Obtain the historical reference or Y3Q4 -1150 1000
markets rate for the periods in Y4Q1 900 -950
question.
(iv) Recalculate the fair value of the hedged Y4Q2 -1800 2000
item and derivative using the historical
reference data. Y4Q3 2000 -2000
(v) Determine the changes in the fair value
of both derivative and underlying item. Y4Q4 1000 -1100

To illustrate this technique, let us consider the

hypothetical data below representing changes (delta) The regression equation is of the form Y =
in the fair value of both the underlying and α + βx + ε, where (i) Y = Change in the fair value
derivative over a four (4) year period. Though we of the hedged item or underlying for the risk being
are considering only sixteen (16) data points in this hedged. (ii) X = Change in the fair value of the
derivative instrument. (iii) α = intercept (iv) ε = Statistics Value
random error term and (v) β the slope of the line.
Intercept 25.2249
In order to run our regression equation and
Slope -1.0493
plot the regression graph, we are going to use the
open source statistical package R (although R2 82.6
Microsoft Excel or SAS could also have been used).
The R software package is a very powerful tool,
The regression equation Y = α + βx + ε
however, one does not have to be an expert in
can be generated using the above output as follows:
order to use it to perform basic regression analysis
such as the one used in this illustration. Hedged Item = 25.2249 + (-1.04930*Derivative).

Using R to Generate Regression Equation. The regression plot below also indicates
that there is a linear relationship between the
The following keyboard approach of
changes in the fair value of the derivative and those
inputting data file into R can be used to read our
of the underlying instrument.
data file.
Derivative <-c (500, 800, -2500,-1000, 2000, -1000,-
500, 2440, 1000, -3400, 2000, -1150, 900, -1800,
2000, 1000)
Hedged_Item <- c (-600, -800, 2800, 900, -2200,
1000, 3000, -2000, -3000, 3000, -2000, 1000, -950,
2000, - 2000, - 1100)
Once the data are read into the software,
we can use the following codes to generate the
correlation coefficient and the regression plot.
#It is of the form linear model = lm
(Independent_Variable~Dependent_Variable)
lm.r = lm(Hedged_Item~Derivative)
summary(lm.r)
Criteria for predicting effectiveness:
plot(Derivative,Hedged_Item)
 R2 should be equal or greater than 80%.
abline(lm.r)  The slope should be between -0.80 and -
When we run the above code we get the 1.25
result documented in the table below. Note that Results:
the actual R screenshot generated after the code is
 R2 = 82.6 > 80%
processed is different from the one shown below
 Slope = -0.80 > -1.0493 >-1.25
but for presentation purposes the important
statistics have been manually entered into the table Based on the above, we can conclude that the
beow: hedging arrangement will be highly effective in
offsetting fluctuations in the fair value or cashflow Period Derivative Hedged Derivative
of the underlying item. -∆ Item - ∆ +
The major drawback of this approach is that Hedged
sometimes a large set of data points is required to Item
achieve effectiveness. It is also manually and 01/01/Y1 0 0 0
computationally intensive because market rates and
Y1Q1 500 -600 -100
fair values (including deltas) have to be generated
for each data point. Fortunately, there are third Y1Q2 800 -800 0
party tools that can be used to calculate the values Y1Q3 -2500 2800 300
more efficiently.
Y1Q4 -1000 900 -100
Although we have used the regression test to
Y2Q1 2000 -2200 -200
perform a prospective test in this case, it can also
be used for retrospective tests. Y2Q2 -1000 1000 0
Volatility Risk Reduction Method Y2Q3 -500 3000 2500
The Volatility Risk Reduction Method Y2Q4 2440 -2000 440
(VRR) compares the standard deviation of the
Y3Q1 1000 -3000 -2000
variability of the fair value or cashflow of the
hedged position (derivative and underlying item) to Y3Q2 -3400 3000 -400
the standard deviation of the variability of the fair Y3Q3 2000 -2000 0
value or cashflow of the hedged position alone.
Y3Q4 -1150 1000 -150
The VRR test can be performed using the formula
below: Y4Q1 900 -950 -50
VRR = 1-(σ (hedged item + derivative)/σ Y4Q2 -1800 2000 200
(hedged item)) where σ = standard deviation.
Y4Q3 2000 -2000 0
The main advantage of the VRR method is
Y4Q4 1000 -1100 -100
that it takes into account standard deviation; hence,
it is consistent with Value-at-Risk (VaR). However, σ of Values 2025.60 849.37
when using the VRR method, a correlation of Ratio of σ (849.37/2025) 0.42
greater than eighty percent (80%) is hard to achieve
VRR = 1 - σ (849.37/2025) 0.58
hence a correlation of greater than forty percent
(40%) is usually considered to indicate high
effectiveness. An example is illustrated below: As shown above the VRR is fifty-eight
percent (58%) which is greater than our threshold
of forty percent (40%), hence the hedging
arrangement can be considered to be highly
effective. The threshold of forty percent (40%) is
different from the 80/125 rule prescribed by the
accounting standards, however, it is very difficult to
achieve that band using the VRR method.
Therefore, consult with your auditors/accountants
before implementing this approach. Based on our
research however, this approach has been
successfully implemented by some companies.
Dollar-Offset or Ratio Analysis Method
This is the most commonly retrospective
effectiveness testing methodology regardless of
which method is used for prospective testing.
However, it is not a well-developed statistical
testing technique because it may fail the
effectiveness testing criteria of 80/125 in periods of
stability, that is, in periods when the changes in the
fair value or cashflow of the derivative and hedged
item are not significant. Hence, it is better to use
the cumulative changes in the fair value or cashflow Scenario Analysis Method (Monte Carlo)
of the variables to avoid this major pitfall. This method is used for prospective testing
This method simply divides in the changes and it uses the simulation approach to determine
in the fair value of the hedging instrument by the the effectiveness of the hedging arrangement. It
changes in the fair value of the underlying basically tests the market factors or rates used to
instrument in order to arrive at a ratio. The calculate the fair value of the derivative and hedged
formula for calculating the Dollar-Offset Ratio item under different plausible scenarios. The
(DOR) is as follows: method uses different market factors and considers
both movements along the yield curve and also
DOR = - Change in fair value of hedging
parallel shifts in the yield curve. A common
instrument/Change in fair value of hedged item.
method used in implementing this method is the
An example of this method is shown below: Monte Carlo approach using very large data set.
A major drawback of the approach is that it
is computationally intensive and assumes a level of
sophistication on the part of the entity using it.
All the methods considered so far are
quantitative in nature albeit with different level of
complexity. Let us now examine the qualitative
techniques.
Critical Terms Method
This method is used to test effectiveness on
a prospective basis only. If the principal terms of
the hedging instrument and of the hedged asset,
liability, firm commitment or highly probable
forecast transaction are the same, the changes in
fair value and cashflow attributable to the risk being
hedged may be likely to offset each other fully,
both when the hedge is entered into and afterwards.
Even if there is a match in the critical terms of the
underlying and the derivative, an organization is
still required to establish that the hedge is effective
on a retrospective basis using a different method.
The following are the key requirements that must
be present before this method can be used for
effectiveness testing:
 The notional amount of the derivative is
equal to the notional amount of the hedged
item.
 The maturity of the derivative equals the
maturity of the hedged position.
 The underlying of the derivative matches
the underlying hedged risk.
 The fair value of the derivative is zero at
inception.
Short-Cut Method
This method is similar to the critical-terms
method but it is not yet allowed under IAS 39. It
can only be used in limited cases involving interest
rate swaps. When this method is used,
effectiveness is automatically assumed and there is
no need to perform effectiveness testing on both a
retrospective or prospective basis hence saving a lot
of documentation work. Essentially when using
this method, a company is assuming no
ineffectiveness. The following criteria are required
before this method can be used;
 The notional amount of the swap matches
the principal amount of the interest-bearing
asset or liability.
 The fair value of the swap at its inception is
zero.
 The formula for computing net settlements
under the interest rate swap is the same for
each net settlement. (That is, the fixed rate
is the same throughout the term, and the
variable rate is based on the same index and
includes the same constant adjustment or
no adjustment.)
 The interest-bearing asset or liability is not
prepayable.
 Any other terms in the interest-bearing
financial instruments or interest rate swaps
are typical of those instruments and do not
invalidate the assumption of no
ineffectiveness.
Though, we have listed a handful of the
requirements for implementing this technique,
there are other requirement too numerous to
list, therefore, organizations interested in
implementing this method are encouraged to
refer to paragraph 68 of SFAS 133.
Other Important Concepts
Credit Valuation Adjustment (CVA)
An important consideration in the
calculation of fair value measurement is the
recognition of counterparty credit risk – relevant
accounting standards now require the inclusion of
the impact of counterparty credit risk in fair
valuations.
CVA is simply the difference between the
risk-free portfolio value and the true portfolio that
takes into account the possibility of counterparty’s
default. In other words, CVA is the market value
of counterparty credit risk. Hence, organizations
should evaluate that CVAs are captured in the fair
value measurements used in effectiveness testing.
Embedded Derivative
A derivative may be embedded within
another contract known as the host contract. If the
host contract is not already been marked to market
with changes taken into earnings, then the
derivative should be bifurcated from the host
contract separately fair valued. An example of an
embedded derivative is call option or conversion
feature in a hybrid bond instrument. In evaluating
whether a host contract has an embedded
derivative or not, an organization review the
contract for the financial instrument and determine
whether the contract contains clauses that meets
the definition of a derivative under IAS 39 or FAS
133.
An illustration of how to bifurcate the fair
value of an embedded derivative from a host
contract is shown below – note that an expert may
have to be consulted to value the embedded
optionality:
any direct way to test this but it is important to be
aware of the technical jargon.
Hypothetical Derivative
When dealing with very complex
instruments (a bond with multiple embedded
optionalities for instance) it may be very difficult to
achieve effectiveness, hence, at inception, a
company may designate a hypothetical derivative
that is opposite the one entered to hedge the
economics of an underlying as the instrument that
will used for assessing effectiveness.
Risk Management & Control Considerations

Description Value Regardless of the method used to account

for a derivative (speculative or hedge accounting),
Fair Value of Hybrid $1200
when using a derivative, a company is exposed to
Instrument (Host
credit, counterparty, settlement, market, model,
Contract)
legal and basis risks, therefore it is essential to have
Fair value of option $400 adequate control infrastructures in place to ensure
calculated using Black- that necessary safeguards are in place. The
Scholes or Binomial
following are the auditing and risk management
Option-Scholes pricing
considerations to consider in evaluating whether an
model
organization’s control over derivative transactions:
Value of Host Contract $800
Only  Control Environment:
o Management has high integrity and
ethical values
o Management philosophy and
Over/Under Hedge operating style are commensurate
This is the extent to which the changes in with the demands and needs of a
well-regarded business organization.
the fair value of the derivative are over (under) the o Management carefully assigns
changes in the fair value of the hedged item, hence, authority and responsibility to
resulting in ineffectiveness. This does not seem to appropriate personnel.
be a problem with fair value hedges since the effect o Human resources policies and
procedures are designed in a way
of any over or under hedging in naturally reflected that the most qualified individuals
in earnings. are attracted to the organization,
hired, trained, rewarded and
However, in the case of cashflow hedges,
retained.
an entity may structure its derivative instruments in  Control Risk:
a way to avoid any ineffectiveness that may result o Segregation of duties between
from under hedging. There does not seem to be purchase and sale transaction,
 authorization, bookkeeping, custody
and valuation.
o Good management oversight.
o Supervisory personnel in the
department reviews ongoing fair
value calculations prepared
internally and provided by third
parties, mark-to-market adjustments
and related journal entries.
o Proper control over fair value
measurement and adequate model
governance controls.
o A new products committee that
evaluates the complexities of new
products and the ability of the entity
to properly value and record such
transactions.
 Information Technology & Analytics:
o The organization has adequate IT
infrastructures to properly record its
transactions.
o Independent validation, analytical
review, benchmarking, data integrity
checks and back-testing.
 Documentations:
o Completeness of records
o Validity of records
o Restricted access to assets and
proper control over database
modifications (DBMODs) and
proper spreadsheet controls
o Properly documented policies and
procedures that are evaluated and
revised on a frequent basis.
 Compliance with Laws and
Regulations:
o Compliance with relevant
accounting standards and principles.
o Compliance with proper laws and
regulation.
 Risk Management:
o Proper risk management controls
are in place to monitor counterparty
and settlement risk,
o Netting agreements are documented
in master netting contracts.
Conclusion
Financial innovations in the recent past
have led to the development of complex financial
instruments especially derivatives for which there
are no straight-forward accounting rules. The
unintended consequence of this development is the
recognition by companies of the increasing
importance of the inter-relationship between risk
management and accounting. The process of using
a derivative to hedge the economics of a position is
a multi-faceted one involving the different
functional areas of a business such IT, risk
management, valuation, internal audit and
accounting – therefore, organizations are
encouraged to ensure that these functional areas
work together to facilitate the efficiency and
effectiveness of the recording and reporting
process.
Perhaps the most challenging element in
using hedge accounting to record derivative
transaction is the requirement to test effectiveness
on a forward and backward looking basis. In this
paper therefore, we examined the tools and
techniques available for performing these tests.
Where applicable, we also highlighted the strengths
and weaknesses of each method and how to
circumvent the shortcomings.
While careful attention has been paid in the
preparation of this material, the author cannot
guarantee the suitability or fit for any purpose.
Therefore, readers are encouraged to consult their
accountants before implementing any of the tools.
References
(i) Statement of Financial Accounting
Standard 133 (SFAS 133).
(ii) International Accounting Standard 39
(IAS 39).
(iii) Statement of Financial Accounting
Standard 115 (SFAS 115).
(iv) Statement of Financial Accounting
Standard 157 (SFAS 157).
(v) Auditing Derivative Instruments,
Hedging Activities, and Investment in
Securities – AICPA Audit Guide,
August 1, 2009.
(vi) Accounting for Derivatives – Advanced
Hedging under IFRS by Juan Ramirez –
John Wiley & Sons Ltd 2007.
(vii) The Financial Economics of Hedge
Accounting of Interest Rate Risk
according to IAS 39 (KPMG) by Dr.
Dirk Schubert.
(viii) Volatility Reduction Method - New
Method for Calculating Hedge
Effectiveness by Andrew Kalotay.
(ix) Resolution Derivative Pricing Software
(x) R Statistical Software for Regression
Analysis
(xi) Financial Instruments – Professional
Risk Managers’ Handbook by PRMIA