CFH: Cross Currency Interest Rate Swap Used as a Hedging Transaction

Valuation and Effectiveness Test

As part of the effectiveness test and the valuation for the cross-currency interest rate swap, you can decide whether to view only the foreign currency effect (spot method) or the total effect of the option (full fair value method: interest rate effect and foreign currency effect).

Spot Method:

As part of the effectiveness test and on the valuation key date, the system translates the nominal values of the cross-currency interest rate swap and the corresponding exposures at the spot rate and then compares them. All the interest flows associated with the cross-currency interest rate swap are ignored.

To value the cross-currency interest rate swap, the system runs a foreign currency valuation and security valuation.

If the hedging relationship is 100% effective, the system posts the foreign currency effect to equity (OCI) without affecting net income. The interest rate effect, however, is recorded in the income statement.

If an effective hedging relationship is not 100% effective, the system differentiates between the following two scenarios:

If the change in value of the hedging transaction is greater than the change in value of the hedged item, the foreign currency effect is posted proportionately to the profit and loss account.
If the change in value of the hedging transaction is less than the change in value of the hedged item, the hedging transaction value is posted to equity and not recognized in profit and loss.

Full Fair Value Method:

As part of the effectiveness test, the system calculates the net present value of the cross-currency interest rate swap and the exposure on the valuation key date. It then compares these values.

To value the cross-currency interest rate swap, the system takes into account the foreign currency effect and the interest rate effect.

If the hedging relationship is 100% effective, the total effect (forex effect and interest rate effect) is recognized in equity without affecting profit and loss.

If an effective hedging relationship is not 100% effective, the system differentiates between two posting scenarios as mentioned above.

Note Note

Alternatively, you can use a suitable hypothetical derivative for both methods in the effectiveness test.

End of the note.

Creating a Hedging Relationship

To create a hedging relationship, proceed as follows:

On the SAP Easy Access screen, choose Treasury and Risk Management Hedge Management and Accounting Hedge Accounting for Exposures Hedging Relationships Hedge Plan (THMEX).
Specify the risk category Exchange Rate Risk and the required data for the new hedge plan.
Choose the transaction activity Planned Transaction or Firm Commitment. Specify the transaction activity Purchase or Sell.
Choose the Hedged Item tab page and select the relevant exposure.
Specify the transaction category Planned Transaction or Financial Liability.
Choose the hedge category Cash Flow Hedge.
On the Hedging Relationship tab page, specify one of your cross-currency interest rate swaps that you entered as the hedging instrument.
Choose hedge strategy 100 CF Spot Rate Period/Period or 200 NPV Period/Period.

Selecting the Hedge Strategy

Spot Method:

We recommend that you use the hedge strategy 100 (CF Spot Rate Period/Period) with calculation type 100 that are defined as standard in Customizing.

If you decide to use a different hedge strategy, it must use a calculation type based on calculation category 003 Cash Flow Differences Acc. to Spot Rate and on Cash Flow Determination Method 1 (FAS133: Anwendung.v.30(b)...).

Full Fair Value Method:

We recommend that you use hedge strategy 200 NPV Period/Period available in Customizing in the standard system with calculation type 200.

If you decide to use a different hedge strategy, it must use a calculation type based on calculation category 100 NPV and on Cash Flow Determination Method 1 (FAS133).

Customizing Settings

In Customizing for the Transaction Manager, you need to define product type 62D (Cross-Currency Interest Rate Swap, Hedge Acc.). To do this, choose Listed Derivatives Transaction Management Product Types Define Product Types .
Product type 62D must be assigned to position management procedure 3000 (Derivatives: Hedging Instr., Hedge Acc.). This setting is made in Customizing for the Transaction Manager under Accounting Settings for Position Management Assign Position Management Procedure .
To use a cross-currency interest rate swap as a hedging instrument, you need to select Awith Reset in the input help Generation Type of Flows for Realization for position management procedure 3000. You do this in Customizing for the Transaction Manager by choosing General Settings Accounting Hedge Accounting for Exposures Assign Update Types for Hedge Accounting .