Methods of effectiveness assessing of hedge instruments application

Abstract

The problem of hedge effectiveness assessing is considered in the article. Hedge accounting is applied by the enterprise in terms of both tests of hedge effectiveness: retrospective and perspective ones. Thus, the estimation of hedge effectiveness is a base  of organization hedge accounting. However, method of hedge effectiveness testing is considered neither in P (S) 13 nor in IFRS. The methods of analyses of the effectiveness of the hedge are studied. An algorithm for selecting the optimal method for determining hedge effectiveness separately for prospective and retrospective testing are worked out.

In foreign practice, the most commonly used methods are:

- A comparison of the essential conditions (critical terms comparison) (conditional agreements and principal amounts, credit risk, pricing, data change rates, terms, amount and currency cash flows);

- Method of dollar  compensation (dollar offset method);

- Regression analysis.

The method of "comparison of the essential conditions" means comparison of important conditions  of hedge instrument  with conditions of the hedge object. This method can only be used in some cases. In addition, it should be used only as a perspective testing of effeciency. The usage of this method  needs additional estimation of  restrospective testing of effeciency. 

Retrospective analysis of hedge efficiency is based on comparison of  of actual results with theoretical data. The results of  comparative analysis allow to identify the optimal hedge strategy. It is determined that full compliance of the hedge item and the hedge instrument the method of comparing the essential conditions is the most appropriate to apply. In case of discrepancy between the essential conditions it is analyzed the feasibility of coefficient method and regression analysis.