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

 

Example

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

Option A:

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

Option B:

  • You can hedge your exposure using a combination of an interest rate swap (USD, variable, to USD, fixed) and a cross-currency interest rate swap (USD, fixed, to EUR fixed).

  • 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 the hedging transactions are linked by the reference category HMT Reference in Hedge Accounting, you can still assign multiple hedging transactions to an exposure, even if the total nominal amount of the hedging transactions exceeds the exposure value.

  • The system also carries out the effectiveness test for this method for each hedging transaction in which it compares the underlying with the exposure. The valuation is run in the same way.

See also:

Cash Flow Hedge (CFH) to Hedge Interest Rate Risk