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Oracle Treasury User Guide
Release 12.1
Part Number E13426-04
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Hedges

Hedging

Hedging is a strategy designed to reduce financial risk using derivative instruments. A hedge can help lock in profits or limit losses by reducing the volatility of an asset or liability by mitigating the risk of loss. For example, a U.S.-based company that receives revenue in a foreign currency has a foreign exchange exposure against the U.S. dollar. To manage this exposure, the U.S. company would likely implement a hedging strategy to protect itself against foreign exchange risk.

Companies using derivatives and subject to FAS133 or IAS39 are required to disclose any hedging activities in their financial statements. In Oracle Treasury, you can track your cash flow, fair value, net investment in foreign operations, and economic hedges as defined by these accounting standards.

Within these major hedge categories, the system supports the following approaches:

Actual Hedges

With an actual hedge, you create your hedge based on your company's actual Receivables/Payables position as of the current system date for hedge items retrieved from Oracle Receivables and Oracle Payables. You can create actual hedges to hedge your foreign exchange exposures for:

Once you have created an actual hedge, your open positions and modify the assigned hedge instruments to cover any changes.

Forecast Hedges

With a forecast hedge, you define your hedge for anticipated invoices before they are actually entered into the system. A forecast hedge is created to hedge anticipated hedge items that may or may not occur for some future period. The formal documentation of these hedges is important in order to qualify for preferential hedge accounting treatment of gains and losses on your assigned foreign exchange forward contracts. You can create forecast hedges for:

When you define a forecast hedge, you determine the selection criteria on how to fulfill the forecast hedge by retrieving Oracle Receivables and Oracle Payables invoices. For example, You can view these hedge items periodically to monitor the hedge fulfillment process. For example, you can view these hedge items daily to see what invoices have been added to the forecast hedge.

Hedges

The first step in creating a hedge is setting up hedge policies. Hedge policies define the exposure sources (known as hedge items) that you want to hedge and the financial instruments (known as hedge instruments) that you want to use to hedge those items using foreign exchange spot/forward deals. For example, if you want to hedge your open foreign receivables using foreign exchange spot/forward deals, you can use the Hedge Policies window to select receivables-customer invoices as a hedge item subsource and foreign exchange forward deals as a hedge instrument subsource. For more information on setting up hedge policies, see: Defining Hedge Policies.

After you set up your hedge policies, you must set up your hedge strategies. Hedge strategies define the reasons that you are hedging your exposures. You can use hedge strategies to define all of the accounting-related reporting information that you require as well as to set up any default information that you want when you create a hedge. Every hedge must be associated with an underlying hedge strategy. You can define as many hedge strategies as you want and each hedge strategy can have multiple hedges associated with it. You can define hedge strategies for a single company or for all companies. For more information about setting up hedge strategies, see: Defining Hedge Strategies.

Once setup is complete, you can begin to create hedges. To create a hedge you must define the following:

A hedge is complete when you have defined both elements of the hedge and changed the hedge status from Designate to Current. For more information on the various hedge statuses, see: Deal Statuses by Deal Type.

You can track the success of your actual hedging activities by looking at your hedge position. The hedge position lets you view your open exposures and your outstanding hedges in the same window. Using this information, you can determine whether or not you need to create additional hedges or terminate existing hedges.

You can track the fulfillment of your forecast hedging activities by performing a real time query in the Current Hedge Items window, or by running the Positions - Forecast Hedge Items Fulfillment Report. For more information, see: Positions - Forecast Hedge Items Fulfillment Report.

This section explains how to define your hedge attributes, hedge relationships and the hedge fulfillment process. It also explains how to view your hedge position.

Hedge Attributes

Hedge attributes define the fundamental information for a hedge. Hedge attributes define the company that is involved in the hedge, the hedge strategy, the start and end dates of the hedge, the currency and notional amount of the hedge, the hedge approach, and the type of hedge. Other key characteristics of the hedge are defined by clicking the Hedge Relationship button.

The hedge attribute contains the actual or forecast hedge approach and determines which eligible hedge items are selected to be assigned under the hedge relationship. An actual hedge approach implies that you want to create a hedge for your actual outstanding exposures. A forecast hedge approach implies that you want to create a hedge for your anticipated exposures that may or may not occur in some future period.

A hedge is fully defined when you assign the attributes to the hedge relationship. For more information on defining a hedge relationship, see: Hedge Relationships.

Entering Hedge Attributes

Use the Hedge Attributes window to define the basic information about a hedge.

Note: You can attach Microsoft Word or HTML documents as well as spreadsheets to the records in the Hedge Attributes window. Descriptive flexfields help store additional hedging policy information in specific fields.

Prerequisites

To define a hedge attribute

  1. Navigate to the Hedge Attributes window.

  2. The status Designate defaults in the Status field.

  3. Enter a description for the hedge in the Description field.

  4. In the Company field, choose the company that you want to define the hedge for.

  5. In the Strategy field, choose the strategy that you want to apply to the hedge. The default information for the hedge defaults into the Hedge Type, Risk, Objective, Hedge % Guideline and Hedge Approach fields based on the hedge strategy selected.

  6. Click in the [ ] field to complete the descriptive flexfield information.

  7. Choose the Main tabbed region.

  8. Choose the currency for the hedge in the Hedge Currency field.

  9. Enter the notional amount of exposure being hedged in the Hedge Amount field.

  10. The hedge approach defaults in the Hedge Approach field based on the strategy code.

  11. Choose the effective date when you want the hedge to start in the Start Date field. The start date must be the same as or earlier than the current system date.

  12. Choose the date when you want the hedge to end in the End Date field. The end date is optional and must be later than the start date.

    Note: The Discontinue Date is a display only field which is available for entry only when setting the status from Current to Dedesignated or Failed.

  13. The Final Fulfilled Amount field displays the final hedge item fulfilled amount found in the Current Hedge Items window. The final fulfilled amount is created when you select the Complete Fulfillment button in the Current Hedge Items window.

    Note: The Final Fulfilled Amount is a display only field which is only enabled when hedge approach is Forecast and when the hedge status is Fulfilled.

  14. Choose the Effectiveness tabbed region.

  15. Enter new or edit the default prospective or retrospective testing information as necessary.

    Note: The ability to change effectiveness testing information for a hedge attribute is based on how the hedge strategy was defined. For more information on setting up a hedge strategy, see: Defining Hedge Strategies.

  16. For cashflow hedges, choose the Reclassification tabbed region.

  17. View the remaining hedge balance in the Hedge Balance field. This field displays the absolute value of original the hedge amount less the sum of Reclassification Hedge Amounts whose Reclassification Date is earlier than this specific record’s date.

    Note: The original hedge amount is the Hedge Items Total in Hedge Currency from the hedge relationship when hedge approach is Actual.

  18. In the Reclassification Hedge Amount field, enter an amount greater than zero and smaller than or equal to the remaining hedge amount (Hedge Balance). You cannot update this field if reclassification date is earlier than the latest revaluation batch end date. This is the reference amount that the reclassified gain/loss amount will be calculated on.

  19. In the Reclassification Date field, enter the date, not earlier than the latest revaluation batch end-date for the hedge company and the hedge start date. You cannot update this field if the reclassification date is earlier than the latest revaluation batch end date. This is the date that the reclassified gain/loss amount will be available for accounting.

  20. View the gain or loss amount in the Reclassified Gain/Loss field, after the revaluation and effectiveness processes automatically generate reclassification amounts for the record entered.

  21. Enter any data in the Comments field.

  22. Choose the View Receivables/Payables button if you want to view the list of hedge items that are available to be hedged.

  23. Choose the Hedge Relationship button if you want to define the hedge relationship. For more information on defining hedge relationships, see: Hedge Relationships.

Hedge Relationships

Hedge relationships define the link between the assigned instruments and items in the hedge.

A hedge is fully defined when you assign the attributes to the relationship that is linked by the hedge number.

Entering Actual Hedge Relationships

Use the Hedge Relationship - Actual window to define the relationship between hedge instruments and hedge items in an actual hedge. You must define the hedge attributes for a hedge before you can define the hedge relationship.

Prerequisites

To enter an actual hedge relationship

  1. Navigate to the Hedge Relationship - Actual window, either from the Hedge Attributes window or from the View Open AR/AP - Hedge Positions window.

  2. Choose the type of hedge item that you want to include in the hedge in the Source Type field.

  3. Enter the hedge item amount in the Amount field.

  4. Enter any comments about the hedge item as necessary in the Comments field.

  5. Click in the [ ] field to complete the descriptive flexfield information.

  6. Select a deal from the list of values in the Hedge Instruments region.

    The deals included in the list are selected based on the company and currency indicated in the hedge attributes. You can allocate a deal to the hedge relationship in part or in full by entering a percentage value in the Original % field or entering the Original Ref Amount directly. . Also, you can assign more than one deal to the hedge relationship.

    The deal number list in the Hedge Instruments region does not include deals with deal date later than the hedge start date. This list only shows deals that have a value date equal to or later than the hedge end date.

  7. Review the hedge relationship and hedge summary to ensure your positions are offsetting.

Actual Hedge Positions

Hedge positions let you view outstanding actual positions in Oracle Receivables or Oracle Payables that are open as of the current system date and compare those positions to your outstanding actual hedges. You can use hedge positions to determine whether or not you need to create or modify hedges to cover your open positions.

Finding Open Positions for Actual Hedges

Use the Find Receivables/Payables window to view your outstanding foreign denominated Receivables, Payables, or both, for a specific company or for all companies you have access to. Once you have identified your open position exposures, you can include these open positions in creating an actual hedge.

In the Find Receivables/Payables window, instead of viewing the hedge positions online, you can choose to submit the Positions - Outstanding Receivables/Payables report using the parameters that you selected in the Find Receivables/Payables window. To submit the report, choose the Generate Report button. If you submit the report, the View Open AR/AP - Hedge Positions window closes and no search results are displayed online. You need to use the report to review the open AR/AP hedge positions.

Note: Submitting the Positions - Outstanding Receivables/Payables report streamlines the query process by generating a concurrent request.

You can also submit the Positions - Outstanding Receivables/Payables report using the Submit Request window. For more information, see Positions - Outstanding Receivables/Payables report.

To find open positions for hedging

  1. Navigate to the Find Receivables/Payables window.

  2. If you want to use an existing criteria set, choose the name of the set in the Criteria Set field. See: Criteria Set.

  3. In the Source field, choose the source that you want to use to find open positions. The possible choices are: Receivables, Payables, or Both. The default value is Receivables.

  4. In the Currency field, choose the currency of the open positions that you want to find.

  5. In the Company field, choose a company for the open positions that you want to find.

  6. If you choose a company, the Ledger Currency field defaults to the ledger currency of the company. If you do not choose a company, you can select a currency and perform a search for all companies that have their ledger in this currency, and that you have authorization to access.

    Note: If you do not choose a company, your search may result in a long query.

  7. If you selected a source of Payables or Both, then in the AP Discount field, choose the type of discount that you want to find for your Payables supplier invoices. The possible choices are: None, Minimum, or Maximum.

  8. Select a date range in the Due Date fields.

  9. Check the Include Unapplied Prepayments (Payables) if you want to include unapplied payments in your open positions.

  10. Check the Include Unapplied Receipts (Receivables) if you want to include unapplied receipts in your open positions.

    Note: The system default for the check boxes is unchecked to enhance the query process.

    The following table shows the additional criteria that you can query against, depending on the source that you choose in the Advanced tabbed region.

    Source Item
    Receivables Receivables Transaction Type
    Receivables Source
    Receivables Customer
    Operating Unit
    Payables Payables Source
    Payables Invoice Type
    Payables Supplier
    Operating Unit
    Universal All of the above

    Note: The results of your query depends on which source you use to define the query. For example, if you select items with the Receivables or Payables source, the query will use an OR relationship for the items. If you select items with the Universal source, the query will use an AND relationship for the items.

  11. If you want to generate the Positions - Outstanding Receivables/Payables report, choose the Generate Report button. If you choose the Generate Report button, the Find Receivables/Payables and the View Open AR/AP - Hedge Positions windows close and no search results are displayed online. You must use the report to review your open positions.

  12. Choose the Find button. All of the open net positions that match your query conditions appear in the View Open AR/AP - Hedge Positions window.

Viewing Open Positions and Outstanding Actual Hedges

Use the View Open AR/AP - Hedge Positions window to view your open positions and outstanding hedges in the same window. This window lets you identify whether or not you need to create or modify hedges based on your net hedge position. The data that appears in this window is read-only.

Note: There are several different ways to navigate to the View Open AR/AP - Hedge Positions window. The navigation path that you choose will affect the tasks that you can perform on this page. See the instructions below for more information.

To view open positions and outstanding hedges

  1. Query the open positions in the Find Receivables/Payables window.

  2. Use the following information to determine whether or not you need to create or modify hedges based on your net hedge position.

  3. To view details about the open position records, choose the open position that you want to view, and then choose the AR/AP Details button.

    If the open position is from Receivables, the View Open AR Details window appears. If the open position is from Payables, the View Open AP Details window appears.

  4. If you accessed this window from the Hedge Attributes window, you can view the Hedge Relationship window by choosing the Hedge Relationship button.

    The Hedge Relationship window appears. For more information, see: Hedge Relationships.

  5. If you accessed this window from the Find Receivables/Payables window and you want to create a new hedge based on one of the open positions, choose the Create Actual Hedge button.

    A new Hedge Attributes window appears. For more information, see: Hedge Attributes.

Criteria Set

You can save the search criteria that you enter in the Find Receivables/Payables window into a criteria set. You can allow other users to have access to your criteria set by making it public, or you can choose to not make it public.

To create a criteria set

  1. Navigate to the Find Receivables/Payables window.

  2. Enter a name for the criteria set in the Criteria Set fields.

  3. If you want to make the criteria set available to other users, check the Public check box. If you do not check the Public check box, the criteria set can only be used by you.

  4. Complete the query fields as required.

    Note: The due date range can be saved as part of the search criteria, but instead of absolute calendar values, the dates are saved as relative values to the system date.

  5. Choose the Save Criteria Set button.

You can update a criteria set and choose the Save Criteria Set button to save the changes. The new criteria set overrides the existing one.

To delete a criteria set

  1. In the Criteria Set field of the Find Receivables/Payables window, select the criteria set that you want to delete.

  2. Choose the Delete Criteria Set button.

Entering Forecast Hedge Relationships

Use the Hedge Relationship - Forecast window to define the relationship between hedge instruments and fulfilled hedge items in a forecast hedge. You must define the hedge attributes for a hedge before you can define the hedge relationship. To fulfill the hedge items, use the Hedge Item Criteria region to create and store the fulfillment rules and criteria information in order for the system to retrieve eligible hedge item transactions from Oracle Payables or Oracle Receivables.

Prerequisites

To enter a forecast hedge relationship

  1. Navigate to the Hedge Relationship - Forecast window, either from the Hedge Attributes window or from the View Open AR/AP - Hedge Positions window.

  2. Choose the type of hedge item that you want to include in the hedge in the Source field.

  3. Enter the from and to dates in the Transaction Date fields.

    Note: The from date cannot be earlier than the start date on hedge attribute or equal to or later than hedge end date. The to date cannot be later than the end date on hedge attribute or earlier than or equal to the hedge start date.

  4. Select a deal from the list of values in the Hedge Instruments region.

    The deals included in the list are selected based on the company and currency indicated in the hedge attributes. You can allocate a deal to the hedge relationship in part or in full by entering a percentage value in the Original % field or directly entering the Original Ref Amount. Also, you can assign more than one deal to the hedge relationship.

  5. Review the hedge relationship that you created and identify your instruments and amounts in the Hedge Summary region.

  6. Choose the Hedge Items button.

    The Current Hedge Items window opens and the system initiates the hedge item fulfillment process by retrieving eligible transactions from Oracle Payables or Oracle Receivables.

Hedge Fulfillment Process

When you define a forecast hedge, you enter hedge item criteria such as source information and transaction dates. You can also enter advanced criteria such as payable invoice type, payables source, supplier, receivables transaction type, receivables source, customer, and operating unit. Once you have entered the criteria, you start the hedge item fulfillment process by either running the Positions - Forecast Hedge Items Fulfillment Report or querying the information in the Current Hedge Items window.

After you have defined a hedge, the system fulfills the forecast hedge by retrieving transactions from Oracle Receivables and Oracle Payables based on the criteria that you entered. You can view the hedge item transaction details periodically in the Current Hedge Items window to monitor the hedge item fulfillment process. The Current Hedge Items window displays individual transaction details and a summary position of your total current hedge items fulfilled compared to your original hedge amount.

You can also view your fulfillment information by running the Positions - Forecast Hedge Items Fulfillment Report. Using this report, you can review either summary hedge level or detail hedge item transaction information for all outstanding forecast hedges. You can also use the Positions - Forecast Hedge Items Fulfillment Report to check for duplicate hedges to see if the same hedge item transaction is included in more than one hedge. For more information, see: Positions - Forecast Hedge Items Fulfillment Report.

To stop the hedge item fulfillment process, you select the Complete Fulfillment button in the Current Hedge Items window. When you select the button, the system updates the Final Fulfilled Amount in the Hedge Attribute window and freezes the current hedge items retrieved from Oracle Payables and Oracle Receivables. The system also changes the hedge status from Current to Fulfilled in the hedge attribute. You can review the fulfillment information and adjust the percentages on individual hedge items before you commit the fulfillment.

Viewing Forecast Hedge Fulfillment Items

Use the Current Hedge Items window to view your forecast hedge fulfillment items.

To view the forecast hedge fulfillment items

  1. Navigate to the Current Hedge Items window.

    The Current Hedge Items window provides the details of your fulfillment.

  2. The following selected information is displayed.

Completing the Forecast Hedge Fulfillment Process

Use the Current Hedge Items window to initiate the steps to complete the forecast hedge fulfillment process.

To complete the hedge fulfillment process

  1. Navigate to the Current Hedge Items window.

  2. Choose the Calculate Hedge Amount button to initiate the complete fulfillment process. When you select the Calculate Hedge Amount button, the system checks against all hedges with a status of Fulfilled and defaults the correct % value available for each transaction and calculates the individual hedge amounts and total amount.

    With the % column enabled, you can do a final review of the hedge items and change the percentage values on an individual hedge item transaction before you commit the fulfillment.

  3. Enter additional information supporting any changes made to the hedge item transactions in the Comments field.

  4. Choose the Complete Fulfillment button to close the fulfillment process for this hedge.

    Important: The Complete Fulfillment button is enabled only after the Calculate Hedge Amount button is selected.

    When you select the Complete Fulfillment button, the system updates the Final Fulfilled Amount in the Hedge Attributes window and freezes the current hedge items retrieved from Oracle Payables or Oracle Receivables. The system also changes the hedge status from Current to Fulfilled in the Hedge Attribute window.

    Note: The fulfillment process for this hedge is eligible to be closed based on the hedge status and hedge end date stored on the hedge attribute.