FVH : Interest Rate Swap and a Cross-Currency Interest Rate Swap Used as a Hedging Transaction

Example:

Your local currency is EUR. You want to use a cross-currency interest rate swap to hedge the interest rate risk of an interest rate instrument with fixed interest in USD. You have two options:

You can use one cross-currency interest rate swap as a hedging transaction to convert USD (fixed) to EUR (variable) for example. This is the standard method delivered with the system.
You can also hedge your exposure using a USD interest rate swap (USD, fixed, to USD, variable) and a USD/EUR cross-currency interest rate swap (USD, variable, to EUR, variable).

Note
End of the note.
- Usually, you cannot assign more than one hedging transaction to an exposure since the nominal amount of the exposure has already been hedged with the first hedging transaction.
- If your hedging transactions are linked by the reference category HMT – Reference in Hedge Accounting , you can still only assign them to one exposure even if the total nominal amount of the hedging transactions exceeds the exposure value. The system calculates the effectiveness for each hedging transaction and compares the underlying and exposure.
- The actual effectiveness of the hedge is usually only derived from the group of assigned hedging transactions.

During the valuation, each hedging transaction is considered individually. The same restrictions apply as for the effectiveness test. If you use the second method, you need to ensure that the assignment is appropriate from a business point of view.