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hedge accounting

Multi-curve approaches in hedge accounting

Hedge accounting is a proven and tested component of your risk strategy

The effective hedging of interest-related market risks is a standard operating procedure for your organisation. For you, the application of hedge accounting means the optimum mitigation of the resulting accounting mismatch. Your strategy for and approach to hedge accounting has been developed and refined over several years, accepted by your auditor and has been successfully applied ever since.

Multi-curve valuations represent the new standard - not only for your quants but also for your hedge accounting

Today, structural market adjustments require taking into account various discount and forward curves or basis spreads in your derivative valuation. Hence, any valuation of your derivatives must follow tested multi-curve approaches to be accepted in the market. Your auditor requires you to consistently apply such an approach to hedge accounting as well.

 

As initial analyses show, your current single-curve approach to hedge accounting leads to considerable ineffectiveness – caused by movements of the tenor basis spread or the FX basis spread – and thus to the termination of your hedge relationships.

 

Therefore, the question you face is how you can continue to use IFRS-compliant hedge accounting effectively in the new multi-curve world without compromising your successful economic hedging strategy.

Benefit from our experience and our proven and well accepted multi-curve hedging methods

According to our longstanding experience , the close integration of economic hedging and balance sheet representation is a fundamental prerequisite for all successful applications of hedge accounting. On this basis, we have developed IFRS-strategies that directly resemble your economic hedging strategy and at the same time make use of multi-curve valuations. Our approach has already been successfully implemented by several clients in Germany and abroad.

 

Without any retrospective adjustment entries or discretisation adjustments , we aim at a prospective optimisation of the designated cash flow components. Extending the classical single curve hedge accounting based on IFRS or the German Commercial Code (HGB), we take into consideration the effects that arise from a change in the tenor or FX basis in the respective designation period. Thus, we achieve a hedge effectiveness of close to 100% even in case of underlyings with very large notionals.

 

Our approach is applicable to fair value hedges as well as cash flow hedges. It offers sufficient flexibility for taking into account the requirements of the most diverse underlying transactions – from plain vanilla bonds to complex and structured transactions.

Obtain clarity on the implications for your business and plan your implementation

In line with our consulting philosophy any one of our approaches goes beyond mere conceptualisation. Based on representative underlying transactions from your asset and liability pools, we will demonstrate to you which one-off effects in your income statement will arise from a multi-curve hedge accounting approach as well as which periodic postings are required by providing you with a prototype specifically adapted to and implemented for your business. Such a realistic simulation will precisely pinpoint the implications of the new hedge accounting approach for your business and makes clear whether changes to your current hedge accounting processes are required.

 

Ultimately, the results of the simulation help you to plan the multi-curve implementation in detail and estimate the associated efforts. We gladly support you in the planning as well as in the actual implementation in your front office and / or accounting systems.

 

To receive detailed information on our references and our approach for multi-curve hedge accounting, call us on +49 69 907370 or email us at info@remove-this.d-fine.de, with the subject line "Multi-curve hedge accounting".