Function documentationHypothetical Derivative

 

The hypothetical derivative is available for hedging relationships that use the hedging scenarios 710 Security Hedged with Interest Swap or 720 Loan Hedged with Interest Swap. The hypothetical derivative is required for performing the effectiveness tests (except for the critical term match method). During the effectiveness test, the hypothetical derivative represents the hedged item.

During designation of the hedging relationship, the system automatically generates the hypothetical derivative by creating a corresponding hypothetical interest swap for the variable security position / loan. The interest swap applies the dates and the variable cash flow of the security position/loan. The system calculates the fixed side of the hypothetical derivative so that, at the time of the designation, the net present value of the interest swap is zero or corresponds to the negative net present value of the hedging instrument. If there is alternative market data for the designation, the system applies it in the creation of the hypothetical derivative.

Prerequisites

  • In the IMG for Hedge Accounting for Positions under Start of the navigation path Effectiveness Test Next navigation step Effectiveness Test Methods End of the navigation path, you have created the methods that you would like to use for the prospective and retrospective effectiveness tests and you have selected as the type of effectiveness test method for these methods the dollar offset method, the schleifer noise method, or the linear regression.

    If you want to use the critical term match method for the prospective effectiveness test, you also create an effectiveness test method for it.

  • Under Define Hedging Profile, you have created a profile and have assigned to it for the prospective and retrospective effectiveness checks the effectiveness test methods defined above.

    In the Hypothetical Derivative Creation Category field, you specify whether the hypothetical derivative to be created has a net present value of zero or whether the net present value corresponds to net present value of the designated swap with inversed plus/minus sign.

Features

During designation of the hedging relationship, the hypothetical derivative is created on the basis of the Customizing settings.