Effectiveness, as Part 1 of this
report indicates, to some extent is in the eye of the
beholder. In other words, the FASB has left the precise
choice of hedge effectiveness testing to companies,
within some preset boundaries.
This discretion raises some key
questions for treasurers and corporate
accountants:
- What are the common tests?
- What are their advantages and
shortcomings?
- What are some of the issues
companies must consider when choosing a test?
- What are the alternative tests
now emerging?
- What are software vendors
offering?
"Back in 1999, prior to the granting
of the one-year delay, most clients were looking solely
at dollar offset," reports Deveaux Barron, director of
Client Services for Principia Partners, a software
vendor. "However, with the extra time to study the
issue, many have realized that dollar offset won't act
in their favor, and in fact, may produce inaccurate
results. Instead, they currently are opting for
combinations of various regression analyses, the
volatility reduction method (VRM), the dual-spot method,
and scenario analysis/sensitivity analysis for
retrospective testing and prospective testing."
In other words, with time, it seems,
the universe of acceptable and desirable effectiveness
tests is expanding. It therefore, behooves treasurers
and risk managers to be familiar with the available
choices and use the test that’s most appropriate for
their hedge strategy. The sections below might help
treasurers make that informed
choice.
