Hedging Strategies For Protecting Profits In Taiwan’s Forex Trading

Hedging Strategies For Protecting Profits In Taiwan’s Forex Trading – How is a hedge of interest rate risk affected by a payment holiday? How is a hedge of interest rate risk affected by a payment holiday? How is a hedge of interest rate risk affected by a payment holiday?

Payment holidays can be granted in times of economic uncertainty to ease pressure on borrowers – eg. as a result of the impact of events in Ukraine on companies with direct or indirect exposure to Russia and Ukraine. A ‘payment holiday’ is when a borrower and a lender agree to adjust the principal and/or interest cash flow of a loan. This can take the form of deferrals (rescheduling cash flows to a later date) or forgiveness (waving cash flows permanently). The adjustment may affect the amortized cost carrying amount of the loan under IFRS 9 Financial Instruments, by using paragraph 5.4.3 (modification of the contractual terms) or paragraph B5.4.6 (revision of cash flows under the contract) or through a partial derecognition or write-off. Changes to contracts to adjust cash flows for payment holidays can also be substantial enough to cause the entire original loan to be derecognized and a new loan to be recognized.

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The effect of a payment holiday on a hedging relationship varies depending on the nature of the payment and the type of hedge.

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Designated as a hedged item in a hedge of benchmark interest rate risk, then the company should consider:

There may be an interaction between the two. There are some general issues to consider for all hedging relationships where payment holidays affect the hedged item. However, depending on the nature of the hedge and the nature of the payment holiday, the implications of the change and hedge accounting may be different. This flowchart provides an overview of the main considerations.

Regardless of the type of hedge, if a payment holiday occurs in a financial asset designated as a hedged item, then a company must consider whether the payment holiday indicates that the financial asset may be has credit damage or has undergone a significant increase in credit risk. (See our web article Is the impact of increased economic uncertainty on credit risk properly considered?)

Under the hedge accounting model of IFRS 9, a hedging relationship is required to be discontinued if the effect of credit risk dominates the changes in value resulting from the economic relationship. Consequently, it appears that if a hedged asset becomes credit impaired then, in many circumstances, the current hedge accounting relationship should be terminated.

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A significant increase in credit risk can also be an important indicator to consider in evaluating the effectiveness of the hedge, but it does not automatically mean that credit risk dominates the economic relationship. This is because the assessment of a significant increase in credit risk is a relative assessment, rather than an absolute one. [Insights 7.9.815]

Hedge accounting, in our view in many circumstances when a hedged asset becomes credit-impaired the existing hedge accounting relationship must be terminated. Generally, this is because if there is a change in the estimated recoverable cash flows of the hedged asset due to credit impairment, the hedge is no longer expected to be more effective in achieving offsetting changes. or at fair value or cash flows at risk being monitored. which is consistent with the original documented risk management strategy for the particular hedging relationship. [Insights 7I.7.730]

Does the effect of a payment holiday otherwise cause a hedge to fail to meet effectiveness or other requirements?

A hedging relationship may need to be terminated for reasons other than the impact on credit risk. In general, a payment holiday can affect the hedge in one or both of the following ways.

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The greater the effect of the holiday holiday on the cash flows of the hedged item, the more likely it is to fail the requirements for the effectiveness of the hedge, which requires that the hedging relationship be terminated.

If a hedged item is a forecast transaction in a cash flow hedge, then that transaction must be probable. [IFRS 9.6.3.3, IAS 39.78]

This relates to a cash flow hedge of future interest receipts. Disregarding the effect of credit risk mentioned above, a payment holiday generally only affects the probability of some cash flows, not the probability of all hedged cash flows. If only certain cash flows are highly unlikely, then judgment is required to determine whether the hedge will continue. The analysis may depend on the exact nature of the documented hedged risk management strategy and the details of the hedge designation. For example, it is necessary to know if the name of the hedge in:

If a hedged cash flow is still considered likely to occur, it will nevertheless be affected by considerations of hedge effectiveness.

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In addition, the hedging requirements of IFRS 9 prescribe the ‘partial cessation’ of hedging relationships when a part of the hedging relationship no longer meets the qualifying criteria. For example, in a cash flow hedge of forecast interest payments, if some of the interest payments are no longer likely to occur then a partial cessation of the hedging relationship may be required rather than a complete cessation of the entire fence. Its practical benefit may be limited, however. Although some individual hedged cash flows can be removed from the hedging relationship, it is not possible to designate a part (other than a strict proportion) of a derivative in a hedging relationship – therefore a partial discontinuity is likely to lead to a continuing imbalance. between the residual hedging cash flow and the hedging instrument. Meanwhile, the hedging requirements of IAS 39 do not allow partial cessation. [IFRS 9.6.2.4, B6.5.27, Insights 7.9.950.10]

Changes in the timing or amount of cash flows of the hedged item can affect the hedge effectiveness assessment in different ways. A careful examination of the fence documentation is necessary, because the effect may depend on the exact nature of the fence name.

A failure of hedge effectiveness that can be attributed to specific cash flows (or lack thereof) may require only a partial stop.

If the hedge continues to meet the effectiveness requirements, then any ineffectiveness arising from the payment holiday should be recognized in profit or loss.

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If a firm determines that a hedging relationship should be terminated due to a payment holiday in the hedged item, then the entire hedging relationship is generally terminated. However, a partial cessation of the hedging relationship may also sometimes occur under IFRS 9, as discussed above.

If a fair value hedge is discontinued, then the company ceases to adjust the carrying amount of the hedged item for changes in fair value arising from the hedged risk from the date of stop. The carrying amount of the hedged item continues to reflect hedge accounting adjustments made prior to discontinuation. If the amortization of the hedge adjustments has not yet begun, then it must begin based on a revised effective interest rate (EIR), which reflects the hedge adjustments on the date the hedge accounting ceases. [Insights 7.9.960.20, IFRS 9.6.5.10, IAS 39.92]

If a change in profit or loss on the hedged financial asset must be calculated due to the bank holiday, then it is the difference between:

If the hedged item should be derecognized, then the hedge adjustment is recognized immediately in profit or loss as part of the gain or loss on derecognition. [IFRS 9.5.4.3, B5.4.6, B5.5.25

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If a cash flow hedge is discontinued, then the company accounts for the amount accumulated in the cash flow hedge reserve as follows.

The change in future cash flows may be subject to uncertainty – e.g. the exact payment dates of delayed cash flows may not be known on the date the holiday is arranged. In this case, judgment is required to assess whether the previously hedged cash flow continues to be highly probable.

The calculation of any modification profit or loss or derecognition profit or loss of the hedged financial asset arising from the payment holiday is not affected by hedge accounting, because there is no hedge adjustment of the financial asset when cash flow hedge accounting is used.

If a company determines that a payment holiday will not result in a significant change in the hedged financial asset, then derecognition of the asset is not necessary. In this situation, the effect of the hedge accounting and the accounting for the holiday holiday will depend on the type of hedge and the nature of the holiday holiday. Changes in the timing and/or amount of the hedged item’s cash flows, however, must be reflected in evaluating the effectiveness of the hedge.

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If the company calculates the trend of the financial asset , should be considered when the amortization of the hedge adjustment has begun. It determines whether the gross carrying amount of the modified asset is measured using the original EIR or an amended EIR that reflects cumulative hedge accounting adjustments.

If amortization has not begun, then the new gross carrying amount of the hedged financial asset is calculated as the present value of the modified contractual cash flows of

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