PeopleSoft Risk Management 9.1 PeopleBook

Creating and Maintaining Hedges

This chapter provides an overview of hedge creation and maintenance and discusses how to:

Create hedges.
Maintain hedges.
Set up hedge groups.
Manage hedge groups.

Understanding Hedge Creation and Maintenance

This section discusses:

Prerequisites.
Common elements.
The hedge life cycle.

Prerequisites

Before you create and maintain hedges, you must:

Analyze cash position and settlements using Cash Management.
From cash position and settlements information, identify investing or borrowing instruments using Deal Management.
Calculate and analyze your risk based on the cash and deal information and decide if you must create a hedge.

Common Elements in This Chapter

Initial Fair Value Attributable to Hedged Risk and Fair Value	Displays the fair value (mark to market) of a treasury deal, or the fair value or cash flows of a hedged item.
Initial Fair Value Adjustment and Fair Value Adjustment	Displays the (cumulative) adjustment amount excluded from the calculation of the change in fair value of a deal or hedged item. This amount corresponds to amortized cost for investments and to ¶ 19 adjustments for a hedged item.
Use Zero	Select this check box to use zero value for calculation, instead of initial fair value amount.
Use Values	Select this check box to use entered values for calculation, instead of initial fair value amount.
New Value	Click to calculate the new value of the hedge per specified parameters.

The Hedge Life Cycle

Here's an overview of the entire hedge life cycle:

Create hedges, either importing information or creating hedges manually.
Adjust and remove hedges using the Hedge Maintenance page.
Process hedge Accumulated Other Comprehensive Income (AOCI) using the Process AOCI page.
Create hedge groups and maintain hedge items and hedge groups.

Creating Hedges

This section discuss how to:

Automatically import hedge information.
Enter hedge designation information.
Enter hedging deal information.
Enter deal accounting information.
Enter hedged item information.
Enter hedge transaction details.
Enter item accounting information.

Pages Used to Create Hedges

Page Name	Definition Name	Navigation	Usage
Other Hedgeable Items	HDG_EXPOSURE_PNL	Risk Management, Analyze Hedge, Other Hedgeable Items, Other Hedgeable Items	You can import a database record from another PeopleSoft application or third-party system.
Hedge Designation	HDG_HEDGE	Risk Management, Analyze Hedge, Hedges, Hedge Designation	Capture descriptive information about your hedging purposes and strategies to meet disclosure requirements.
Hedging Instrument	HDG_HEDGE_DEAL	Risk Management, Analyze Hedge, Hedges, Hedging Instrument	Capture information about the deal you will use to protect the hedged exposure.
Deal Accounting	HDG_HEDGE_DEAL_AC	Risk Management, Analyze Hedge, Hedges, Deal Accounting	View the accounting associated with your hedging relationship.
Hedged Item	HDG_HEDGED_ITEM	Risk Management, Analyze Hedge, Hedges, Hedged Item	Set up the exposure that you will hedge.
Hedge Transaction Details	HDG_ITEM_FVRAL_DTL	Click the Details link on the Hedged Item page.	Capture higher resolution data about your hedge.
Item Accounting	HDG_HEDGED_ITEM_AC	Risk Management, Analyze Hedge, Hedges, Item Accounting	Set up accounting and effectiveness testing of your hedge

Automatically Importing Hedge Information

Access the Other Hedgeable Items page (Risk Management, Analyze Hedge, Other Hedgeable Items, Other Hedgeable Items).

Select the type of item whose risk exposure you want to minimize, and select the status:

Type	Status	Conditions
Forecasted Transaction	Firm Commitment or Asset / Liab (asset / liability) Forecasted Transaction No Longer Probable Probably Will Not Occur	If the type is a Forecasted Transaction, enter earnings information in the available grid.
Net Investment in a Foreign Op (net investment in a foreign operation)	Cancelled Net Investment in a Foreign Op
Recognized Asset or Liability	Recognized Asset or Liability Sold or Bought or Written Off
Unrecognized Firm Commitment	Cancelled Recognized Asset or Liability Unrecognized Firm Commitment

Note. Fields and available status values change depending on the value you select in the Type field.

Risk Type	Select a type of risk for the hedged item.
Financial Type	Select Financial Item or Non-financial Item. If the risk to be hedged is financial, enter its Amount and its currency (in the field next to the Amount field). If the risk is non-financial, enter its Quantity, and select the appropriate Unit of Measure.
Foreign Currency Denominated	Select if the hedge is in a foreign currency, and select the appropriate value in the CurrencyCurrency field.
Period Start and Period End	Select the active period start and end dates for the hedge.
Review Date	Select the final review date for the hedge.
Final Earnings Effect	Select to include the effect of the specified amount and percentage on hedge final earnings.

Entering Hedge Designation Information

Access the Hedge Designation page (Risk Management, Analyze Hedge, Hedges, Hedge Designation).

Note. The page display changes depending on the Hedge Type.

Hedge Type

This field is a read-only. The hedge type is selected at the business unit level on the Treasury Options page.

Designates a hedge as either an IAS 39 Hedge, Economic/Other Hedge, a FAS 133 Hedge, or a FAS 52 Hedge. From the drop-down list box next to the right-hand Hedge Type field, you can further define your hedge using any of the following:

Cash Flow Hedge: Hedge of exposure to cash flow variability from a particular risk (¶ 18(c)).

Fair Value: Hedge of exposure to changes in the fair value of an asset, liability, unrecognized firm commitment, or identified portion thereof from a particular risk (¶ 18(b)).

FX Cash Flow: Hedge of exposure to cash flow variability from changes in foreign currency exchange rates (¶ 18(d)(3)).

FX FV of Available for Sale Security: Hedge of the change in the fair value of an available-for-sale debt security (or a specific portion) from changes in foreign currency exchange rates.

You can hedge available-for-sale equity securities if changes in fair value come from changes in foreign currency under the following conditions. You have not traded the security on an exchange (or another established marketplace) where trades are denominated in your functional currency. Dividends, or other cash flows, to the security's holders are denominated in the same foreign currency that you expect to receive when you sell the security (¶ 18(d)(3).

FX FV of Firm Commitment: Hedge of a foreign currency exposure to variability in the functional-currency-equivalent cash flows from foreign-currency-denominated forecasted transactions and foreign-currency-denominated intercompany transactions (¶ 18(d)(2).

FX Hedge of Net Investment: Hedge of foreign currency exposure to your net investment in a foreign operation, which is viewed for accounting purposes, as a single asset versus several single individual assets and liabilities that make up a subsidiary's balance sheet (¶ 18(d)(4).

Hedge Relationship

Select descriptors of your various risk management strategies and practices (¶ 44). It is up to you to determine a reasonable, shorthand description that parties outside your organization can correlate to your actual complex activities. It is a good idea to obtain validation from your company's auditors. To complete the disclosure requirements in ¶ 44, Risk Management provides a 1,000-character, free-form field so that you can capture context-sensitive issues underlying your hedging activities.

Hedge Strategy

Select a hedge strategy based on the type of risk being hedged. Doing so enables the default parameters that were entered on the Hedge Strategy page for the specified hedge strategy.

Effective Assessment Methods

Retrospective Evaluations, Prospective Considerations, and Ineffectiveness Method	Effectiveness tests are means for an organization, its stakeholders, and external auditors to evaluate whether risk management strategies are on track, whether hedges are working or are likely to work as planned, and thus are within bounds for special accounting. When you set up a transaction and its correspondent hedged deal, link the two and document them for FAS 133. You must also define and document tests of methodologies to assess hedge effectiveness. (¶ 62.) Effectiveness assessment methods are dictated by ¶s 65 and 68-70. They are Retrospective Evaluations, Prospective Considerations, and Ineffectiveness Method. Select one of the following values for each of the fields: Assume No Ineffectiveness: Select this value (¶s 65, 68-70) if you are using the Shortcut Method for IRS Hedge. FAS 133's ¶ 68 permits the Shortcut Method for an IRS Hedge. You can use this method of effectiveness assessment only on interest rate swaps. If you selected Assume No Ineffectiveness in the Ineffectiveness Assessment field, and the hedge is an interest-bearing financial instrument with an interest rate swap (¶s 68-70,114,132), then you can select the Shortcut Method for IRS Hedge check box to compute ¶ 22(b) or ¶ 30(b) amounts. Correlation − Regression: This is a statistical correlation test between some attribute of the hedging deals compared to that attribute of the hedged items. Cumulative Offset: Compares the cumulative changes in fair value of the hedging deal with the cumulative changes in fair value of the hedged item. In each period in which this comparison is made, the two amounts must match within a tolerance of 80 percent to 125 percent. Note. In addition, when you perform the periodic assessment of effectiveness, you must do more than just run the Assessment reports or process (such as the Hedge Effectiveness report and the Regression test). You should also reassess your expectation that the hedge will continue to be highly effective. This would involve reexamining all appropriate factors, including those described in DIG issue G10. Your accounting procedures must meet extensive criteria to qualify for the Shortcut Method, which is also known as Assuming No Ineffectiveness with an Interest Rate Swap. Refer directly to ¶ 68 of FAS 133 to ensure that your scenario qualifies for this accounting treatment of hedging. Assume No Effectiveness does not imply that there will be no periodic assessment of effectiveness. According to DIG G9 - Cash Flow Hedges: Assuming No Ineffectiveness When Critical Terms of Hedging Instruments and Hedged Transaction Match in a Cash Flow Hedge, www.rutgers.edu/Accounting/raw/fasb/derivatives/issueg9.html, "An entity is still required to perform and document an assessment of hedge effectiveness at the inception of the hedging relationship and on an ongoing basis throughout the hedge period."
Risk Offset	Select One-sided Offset Against Gains, Onesided Offset Against Losses, or Symmetrical Offset. ¶ 20(b) and ¶ 28(b) discuss how to assess effectiveness when the hedging instrument provides only a one-sided offset against changes of the hedged item (such as when an option is used).
Inception Date	Displays the current date until you save the page. You record the entity that is creating the hedged relationship—at the data entry level—using the logon user ID. PeopleSoft Workflow can also address your organization's management authorization process, providing further audit trails.
Discontinued Date	Use to record the actual date that a hedged relationship terminates (¶s 25 and 32). The system completes this field as you undesignate the hedge later in the hedging process. If you terminate a hedged relationship and you have sufficient reason to resume the same course with the exact variables, you must create a new hedge relationship. That is, you must create a hedge for accounting purposes that is different from the one that began and ended earlier. This requirement to create a new hedge can also apply to the maturity of a derivative contract.

Note. Once a hedged relationship terminates, it cannot be revived.

Risk Being Hedged

Per ¶ 21(a-f), you can hedge only the four risks listed:

Changes in Overall Fair Value	Select to hedge non-financial risks, such as commodities. Selecting this check box automatically clears any other hedged risk options selected.
Interest Rate Risk	Select to hedge risk of instability in interest rates.
Foreign Currency Exchange Risk	Select to hedge risk of fluctuation of foreign currency exchange rates.
Credit Risk	Select to hedge risk of credit variability.
Other and Risk Name	Select the Other field and enter a name to designate another type of risk investment to be hedged.
Comments	Click to access the Details page to record details of the hedged risk entered in the Risk Name field.

Entering Hedging Instrument Information

Access the Hedging Instrument page (Risk Management, Analyze Hedge, Hedges, Hedging Instrument).

Sequence

Displays the default sequence number of I.Per ¶ 18, you can have multiple deals designated as the hedging instrument. Enter the Deal Business Unit and Deal ID, which create the link to the protected deal.

Proportion Designated as Hedge

Given the difference in financial values that deals can have, use this field to define that only a certain percentage of the hedging deal actually be used for hedge purposes.

Note. FAS 133's ¶ 18 requires that you document that you will use only a portion or percentage of a deal for hedging purposes. It states that either all or a proportion of a derivative may be designated as the hedging instrument. The proportion must be expressed as a percentage of the entire derivative so that the profile of risk exposures in the hedging portion of the derivative is the same as that in the entire derivative. (Thus, an entity is prohibited from separating a compound derivative into any such component as the hedging instrument, except as permitted at the date of initial application by the transition provisions in ¶ 49.)

Assessing Hedge Effectiveness

Define aspects of how the hedge will be evaluated.

Include All Gains or Losses	Select to assess the effectiveness of all fair value changes (¶ 63).
Exclude Time Value	Select to calculate changes in fair value where effectiveness is evaluated on a cumulative basis.
Analytics Mode	Select third-party analytics to calculate the part of your hedge used to assess hedge effectiveness.
Added to Hedge	Displays the current date as the default, which becomes part of the audit trail when the page is saved. The operator's login user ID appears alongside the Added to Hedge field in the view-only By field.
Removed from Hedge	Enter the date the hedging relationship terminates, or the system will automatically enter the maturation date of the hedged deal as that date passes in time. (See ¶s 25 and 32.)

Entering Deal Accounting Information

Access the Deal Accounting page (Risk Management, Analyze Hedge, Hedges, Deal Accounting).

Initial Fair Value

Enter the initial market to market value amount of the deal, which can be a positive or negative number.

Calculate

Click to recalculate a new fair value and add a new line to the Fair Value History grid. The Calculate button appears only if the Exclude Time Value checkbox is selected on the Hedging Instrument page.

Use Values

Select this check box to use specified values in the Fair Value and Fair Value Adjustment fields for calculation, instead of calculated values from Risk Analytics.

Entering Hedged Item Information

Access the Hedged Item page (Risk Management, Analyze Hedge, Hedges, Hedged Item).

Hedged Item Source

Select Treasury Deal (a deal resident in the PeopleSoft system) or Other Hedgeable Item to indicate what you are hedging.

Financial Type

You can set up the hedged deal as a Financial Item or a Nonfinancial Item.

Note. The page changes depending on the financial type that you selected.

Hedged Item/Transaction

Portion	Select what portion or percentage of your hedged item or transaction will be used in the hedging relationship: All: Use the entire hedged item or transaction. Embedded Option/Cap/Floor: Enables you to handle embedded derivatives that do not require separate accounting, for example if the deal can pass a portability test (¶s 21(a) to 22(c)). Percentage: Select to enable thePercentage field so that you can specify the exact percentage that you will use. Residual Value in Lease: Available only for fair value hedges. Selected Cash Flows: Available only for cash flow hedges.
Exposure Business Unit	Select the business unit for the exposure.
Added to Hedge or Removed from Hedge	Enter the effective date for the fields.
Remove	Click if you are removing the item from the hedge.

Entering Hedged Transaction Details

Access the Hedged Transaction Details page (click the Details link on the Hedged Item page).

You can capture hedge information and add the level of detail necessary for your internal monitoring of deals. For example, if you hedge commodities, you will have commodity values available from a PeopleSoft table, such as Crude Oil. The Hedged Transaction Details page enables you to record grades of crude oil, the regions they are from, or other distinguishing traits.

Available fields depend on the hedge type that you specify.

Hedge Type	Available Page Fields
Cash Flow	Expected to Occur Period Start, Expected to Occur Period End, Expected Cash Flows, Expected Currency Amount, and Quantity
Foreign Exchange	Exchange Period Start, Exchange Period End, Purchase, Sale, Fixed Price, or Face Value
Fair Value	Hedged Item End Date, Asset Liability, or Face Value

Note. In the context of FAS 133's language, the free-form text field enables you to explain your hedging with "sufficient specificity." This can include references to the Purchase Order numbers that you hedge or other details that your risk managers and auditors consider relevant for meeting the intent of FAS 133.

Entering Item Accounting Information

Access the Item Accounting page (Risk Management, Analyze Hedge, Hedges, Item Accounting).

Note. Available fields depend on the hedge type selected at the business unit level.

Hedge Type	Page Fields	Description
Cash Flow Hedges	Initial Future Cash Flow Attributable to Hedged Risk	The fair value (mark to market) of a treasury deal, or the fair value or cash flows of a hedged item.
Cash Flow Hedges	Fair Value Adjustment	The (cumulative) adjustment amount excluded from the calculation of the change in fair value of a deal or hedged item. Corresponds to amortized cost for investments and to ¶ 19 adjustments for a hedged item.
Fair Value	Amortize Carrying Amount Adjustment	Select this check box if the adjustments of the carrying amount of the hedged item should be amortized to earnings (¶ 24).
Fair Value	Amortization Period Begin/End	Define date parameters for the amortization period calculation.

As of Date	The fair value calculation is based on this date.
Fair Value	The value of the deal on the As of Date.

Maintaining Hedges

This section discuss how to:

Remove and adjust hedges.
Process hedge AOCI.

Pages Used to Maintain Hedges

Page Name	Definition Name	Navigation	Usage
Hedge Maintenance	HDG_WRKFLW	Risk Management, Analyze Hedge, Hedges, Hedge Maintenance	Dedesignate the hedge relationship or remove the hedged deal from the hedge, or adjust AOCI.
Hedge AOCI Adjustment	HDG_AOCI_RUN_CNTL	Risk Management, Analyze Hedge, Hedge AOCI Adjustment, Hedge AOCI Adjustment	Run the Adjust Hedge AOCI Application Engine process (HDG_AOCI_ADJ) to perform AOCI adjustments on your hedges.
Hedge Effectiveness	HDG_CUM_OFST_INQRY	Risk Management, Analyze Hedge, Hedge Effectiveness, Hedge Effectiveness	Search and review cumulative offset information for specified hedges.
Hedge Summary	HDG_SUMMARY	Risk Management, Analyze Hedge, Hedge Summary, Hedge Summary	View online report of summarized hedge information a specific hedge.

Removing and Adjusting Hedges

Access the Hedge Maintenance page (Risk Management, Analyze Hedge, Hedges, Hedge Maintenance).

AOCI is an account balance associated with the hedged transaction. It represents derivative (hedge deal) gains or losses that have been set aside from earnings and parked in the AOCI account instead. In essence, ¶ 30(b) says, "Set aside derivative gains or losses, but don't set aside too much." ¶ 30(b) addresses recognizing that you have set aside too much and puts the excess into an earnings account.

For Hedged Item

The fields available change, depending on the FAS 133 Hedge Type that you selected on the Hedge Designation page.

Hedge Type	Page Fields	Description
All hedge types.	Remove Hedged Item from Hedge	Remove hedged item from the hedge. By itself, making this selection does not terminate the hedge. Note. This check box appears for all hedge types.
Cash Flow Hedge FX Cash Flow Hedge	Reclassify AOCI	Select the Reclassify AOCI check box when reclassifying the adjusted other comprehensive income from cash flow hedges, and enter the Reclassify Amount. Or select the Will Not Occur AOCI Reclassify check box.
Cash Flow Hedge FX Cash Flow Hedge	Final Earnings Effect	Select to include the effect of the specified Amount and Percentage on hedge final earnings.
Cash Flow Hedge FX Cash Flow Hedge	Current AOCI Balance	Displays the current AOCI balance for the hedge.
FX FV of Available-for-Sale FX FV of Firm Commitment Fair Value Hedge	Amortize Carrying Amount Adj (amortize carrying amount adjustment)	Select this check box if the adjustments of the carrying amount of the hedged item should be amortized to earnings. (¶ 24) Also enter the Amortization Period Begin Date and End Date.

Setting Up Hedge Groups

To define hedge groups, use the Hedge Group Definition component (HDG_COLLECTION_HDG_GBL).

This section discuss how to:

Define hedge groups.
Add to a hedge group definition.

Pages Used to Set Up Hedge Groups

Page Name	Definition Name	Navigation	Usage
Define Hedge Groups	HDG_COLLCTN_HDG	Risk Management, Administer Risk, Define Hedge Groups, Define Hedge Groups	Set up hedge group definition.
Add to Hedge Group	HDG_COLL_FAV_A	Click the Add to Hedge Group button on the Define Hedge Groups page.	Search and add individual hedge items to a hedge group.

Defining Hedge Groups

Access the Define Hedge Groups page (Risk Management, Administer Risk, Define Hedge Groups, Define Hedge Groups).

Add to Hedge Group

Click to search and add individual hedge items to this hedge group. Your selected hedge items, added to the hedge group definition, appear in the Hedge Details group box.

Adding to a Hedge Group Definition

Access the Add to Hedge Group page (click the Add to Hedge Group button on the Define Hedge Groups page).

Use the upper portion of the page to search for hedge items. All matching results appear in the lower portion of the page. Select a hedge item check box and click the Update button to add the hedge item to the hedge group.

Managing Hedge Groups

After creating hedge items and setting up hedge group definitions, you can aggregate them into collections and maintain them from a central location.

This section lists common elements and discuss how to:

Manage your hedge groups.
Update your hedge groups.
Manage items in a hedge group.

Common Elements in This Section

Inception Date	Displays the active date of the hedge item.
Retrospective Evaluations	Displays the retrospective evaluation value for the hedge item.

Pages Used to Define and Manage Hedge Groups

Page Name	Definition Name	Navigation	Usage
My Hedge Groups	HDG_COLLECTION_FAV	Risk Management, Administer Risk, My Hedge Groups, My Hedge Groups	Aggregate and maintain your hedge groups from a central location.
My Hedge Groups	HDG_COLLCTN_FAV_A	Click the Update My Hedge Groups link on the My Hedge Groups page.	Add or clear hedge groups from the My Hedge Groups page.
Hedge Group Manager	HDG_COLLCTION_DTL	Risk Management, Analyze Hedge, Hedge Group Manager, Hedge Group Manager	Review and maintain hedge items for a selected hedge group.

Managing Your Hedge Groups

Access the My Hedge Groups page (Risk Management, Administer Risk, My Hedge Groups, My Hedge Groups).

Update My Hedge Groups	Use to add existing hedge groups (assigned to you) to this page.
Create a New Group	Add a new hedge group on the Hedge Group Definition page.
Search for a Hedge Group	Search for a hedge group using the Hedge Manager.

Updating Your Hedge Groups

Access the My Hedge Groups - Update page (click the Update My Hedge Groups link on the My Hedge Groups page).

Update

Select the check box of a hedge group and then click the Update button. The selected hedge group appears on the My Hedge Groups page. To clear a hedge group from the My Hedge Groups page, deselect the respective check box and click Update.

Managing Items in a Hedge Group

Access the Hedge Group Manager page (Risk Management, Analyze Hedge, Hedge Group Manager, Hedge Group Manager).

Hedge Group	Access the Define Hedge Groups page for the specified hedge group.
Hedge IDs	Navigate to data about a particular hedge item.
Add a Hedge	Click this link to add another hedge item to this group.

Sequence	Displays the default sequence number of I.Per ¶ 18, you can have multiple deals designated as the hedging instrument. Enter the Deal Business Unit and Deal ID, which create the link to the protected deal.
Proportion Designated as Hedge	Given the difference in financial values that deals can have, use this field to define that only a certain percentage of the hedging deal actually be used for hedge purposes.

Initial Fair Value	Enter the initial market to market value amount of the deal, which can be a positive or negative number.
Calculate	Click to recalculate a new fair value and add a new line to the Fair Value History grid. The Calculate button appears only if the Exclude Time Value checkbox is selected on the Hedging Instrument page.
Use Values	Select this check box to use specified values in the Fair Value and Fair Value Adjustment fields for calculation, instead of calculated values from Risk Analytics.