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Hedging with Helen: Flexibility of Hedge Accounting

Today, I want to tell you that hedge accounting is more flexible than you think. I specifically want to talk about when we’re forecasting transactions that might happen in the future.

Recently we talked about the future issuance of fixed rate debt. And a lot of people are intimidated, they’re “I can’t do that. I don’t know what date my fixed rate debt is going to issue a year from now.”

You don’t put, you know, a timeframe. That’s what effectiveness testing is for. It’s okay. You don’t have to know precisely. So we have this period within which things can happen.

I think I see a lot of this also on the FX side. People are intimidated about coming in because they’re like, “I don’t know what day that transaction is going to happen.” Well. People are much more flexible because they’re like, “well, I don’t even know what month.” And I’m going to tell you. You actually don’t have to know what month the transactions are going to happen. What you have to do is use an instrument, and for contracts and option contracts and currency are those kinds of instruments, that are equally effective, whether the transaction that you’re hedging is going to happen, you know, in this month or the month after and sometimes the month after.

I know that we work with a lot of high-growth companies where it’s very difficult for us to forecast by month by currency exactly when things are going to happen. In that case, what we use is a more flexible approach.

Hedge accounting is accessible. You can get it. There are hardly any circumstances unless you’re speculating, in which case we’re not going to get hedge accounting. But there’s hardly any situation where if you truly have risk that you can’t get hedge accounting. If you’re having a concern that it doesn’t apply to you, give us a call.

It Makes Me Crazy…

One of the things that really makes me crazy with respect to hedge accounting is when people that have forecasted transactions are told they can’t get special hedge accounting because they don’t know precisely when it’s going to happen. They don’t know exactly how much they’re going to get, exactly which month.

That’s okay. There’s a lot of flexibility that is available in special hedge accounting. If you truly have an exposure, you should be able to hedge it and get special hedge accounting.

That’s what effectiveness testing is all about. It works on your behalf to show that an instrument that maybe goes a little longer is going to be effectively effective in hedging an exposure that goes a little shorter and that we can make ourselves whole. Special hedge accounting is available if you really have an exposure. Don’t let them tell you that it doesn’t work.

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