CFH: Interest Rate Swap Used as a Hedging Transaction

Valuation and Effectiveness Test

As part of the effectiveness test, the system determines the forward rates of the variable interest payments of the interest rate swap and the assigned variable interest payments of the exposure. These values are discounted on the valuation key date and then totaled for the underlying transaction and hedging transaction. Both totals are then compared.

For the interest rate swap, the system runs a foreign currency valuation and security valuation.

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

Note Note

If the underlying transaction and the hedging transaction (interest rate swap) are concluded in local currency, the total effect comprises only the interest rate effect. If a foreign currency is involved, the total effect comprises the interest rate and foreign currency effects. The system cannot manage these effects separately in the effectiveness test.

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.

End of the note.

Alternatively, you can use a hypothetical derivative in the effectiveness test.

Creating a Hedging Relationship

To create a hedging relationship, proceed as follows:

On the SAP Easy Access screen, choose Treasury and Risk Management Transaction Manager Hedge Management and Accounting Hedge Accounting for Exposures Hedging Relationships Hedge Plan (transaction THMEX).
Specify Interest Rate Risk as the risk category.

Note
If the Single Hedged Item indicator is set, the system assigns all the loaded exposures (an interest rate instrument or the interest payment in a transaction) to only one hedged item. We recommend setting this indicator if you want to hedge multiple interest payments for an interest rate instrument using an interest rate swap.

End of the note.
Once the underlying transaction has been uploaded, Liabilities or Financial Assets are displayed under the Transaction Category, and Position or Cash Flow are displayed under Transaction Activity. You can also specify the underlying transaction manually.
Choose the Hedged Item tab page and select the hedge category Cash Flow Hedge.
On the Hedging Relationship tab page, specify the interest rate swap that you entered as the hedging instrument.
Select the hedge strategy 103 CF Forward Discounted, Cumulated.

Selecting the Hedge Strategy

We recommend that you use the hedge strategy 103 CF Forward Discounted, Cumulated delivered as standard in Customizing with the calculation type 103.

If you decide to use a different hedge strategy, this strategy must use a calculation type based on calculation category 003 Cash Flow Differences, Forward Rate Discounted and on Cash Flow Determination Method 2 (FAS133: DIG G7 method 1).

Customizing Settings

In Customizing for the Transaction Manager, you can use the standard product type 62C (Interest Rate Swap, Hedge Accounting) by choosing Start of the navigation path OTC Derivatives Next navigation step Transaction Management Product Types Define Product Types End of the navigation path .

Product type 62C is assigned to position management procedure 3000 (Derivatives: Hedging Instr., Hedge Acc.). This setting is made in Customizing for the Transaction Manager under Start of the navigation path Accounting Next navigation step Settings for Position Management Assign Position Management Procedure End of the navigation path .