Hypothetical Derivatives

For Hedging Instruments being cross-currency interest rate swaps, it is required to compute the Basis Cost. This cost arises due to the presence of the basis spread in the discount curve.

The OFS HM application computes two different Fair Values using the two discount curves defined in the application. The first Fair Value is the actual Fair Value of the Instrument, whereas the second Fair Value is the Fair Value of the Hypothetical Derivative. Basis Cost is computed as the difference between these two Fair Values.

Note:

During Fair Value Gain or Loss computation, the change in Basis Cost is also computed along with a change in Fair Value. For more information, see the Profit or Loss Accounting chapter.