Hypothetical (Perfect) Derivative 

If the critical terms of a hedged underlying transaction (such as interest rate adjustment dates or the interest rate reference) do not match those of the hedging transaction, you can use a hypothetical derivative to test the effectiveness of the hedging relationship. (See Derivatives Implementation Group, Statement 133, Implementation Issue No. G7).

The hypothetical derivative represents a perfect hedge transaction and is a modified version of the real hedge transaction that would completely cover the risk involved.

To use the hypothetical derivative in a hedge strategy, you need to use a suitable calculation type and hedge strategy. To do this, in Customizing for the Transaction Manager, choose Hedge Accounting for Exposures → Effectiveness Test → Define Calculation Types, and set the Hypothetical Perfect indicator. You can make the required hedge strategy settings under Define Hedge Strategy.

Hypothetical derivatives are simply a means for the system to make calculations if no valuations or postings have been made. For this reason, hypothetical derivatives are not displayed as real transactions. We therefore strongly recommend that you use separate product types for the hypothetical derivative.

 

Effectiveness Test and Posting

The system compares the changes in value of the real hedging transactions (either cumulatively or for selected periods) with the changes in value of the hypothetical derivative.

 

Since the hedging transaction and hypothetical derivative involve hedging instruments, the changes in value do not offset each other.

 

The hedging relationship is effective if the ratio between the change in value of the real hedging transaction and the change in value of the hypothetical derivative is within the determined effectiveness range.