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Interest Rate Swap

Derivatives are often used for hedging to offset risks from changes in commodity prices, foreign exchange rates, or interest rates of underlying assets. Hedging involves designating derivatives as hedging instruments so their value changes offset the hedged item. Common hedging instruments include interest rate swaps, forwards, futures, and options. The accounting treatment depends on whether it is a cash flow hedge, fair value hedge, or has no hedging designation.

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21 views

Interest Rate Swap

Derivatives are often used for hedging to offset risks from changes in commodity prices, foreign exchange rates, or interest rates of underlying assets. Hedging involves designating derivatives as hedging instruments so their value changes offset the hedged item. Common hedging instruments include interest rate swaps, forwards, futures, and options. The accounting treatment depends on whether it is a cash flow hedge, fair value hedge, or has no hedging designation.

Uploaded by

Chelsea Concepcion
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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DERIVATIVE (PFRS 9)

DERIVATIVE HEDGING most often derivatives are used for hedging


derives its value from the movement in designating one or more hedging instruments so that the change
commodity price, FOREX rate, and interest rate of in fair value or cash flows is an offset, in whole or in part, to the
an underlying asset or financial instrument change in fair value or cash flows of a hedged item

HEDGING

HEDGING INSTRUMENT HEDGED ITEM


derivative whose fair value or cash flows would be underlying asset, liability, firm commitment, highly
expected to offset changes in the fair value or cash flows probable forecast transaction or net investment in a foreign
of the hedged item operation

MEASUREMENT: AT FAIR VALUE

An entity shall recognize and Both the fair value and notional An unrealized gain or loss is
measure all derivatives as either shall be fully disclosed. recognized when there is a change
asset or liability at fair value. in the fair value.

Whether the change in fair value is recognized in profit or loss or in other


comprehensive income depends on the following situations:

CASH FLOW HEDGE


variability in cash flows from a
probable forecast transaction FAIR VALUE HEDGE
uncommitted but anticipated future transaction derivative that offsets in whole or
in part the change in fair value of
RECOGNITION: an asset or a liability
NO HEDGING DESIGNATION
“speculation” (committed future transaction)
recognized in profit or loss OCI to the extent P/L RECOGNITION: P/L
that the extent that ineffective portion
hedge is effective The hedged item is adjusted to
conform with fair value.
The hedged item is not adjusted to conform
with fair value.

EXAMPLES OF DERIVATIVES (OFTEN DESIGNATED AS HEDGING INTRUMENTS)

interest rate swap forward contract futures contract option

INTEREST RATE SWAP

Pay: Loan Margin Pay: Fixed Rate

Pay: Variable Interest Receive: Variable Interest


LENDING HEDGING
BORROWER
BANK BANK

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