A Quarterly FAS 133 Update from Hedge Trackers, LLC
- Get a head start. The past two quarters’ astronomical volatility levels are bound to produce some nasty surprises. To avoid last minute shocks, we urge you to (1) work with auditors to review your hedge program and valuation approaches prior to year end; and (2) execute as many hedges as you can midmonth to avoid year-end market illiquidity.
- FAS 161 effective date. FASB amended FAS 161′s effective date to any reporting period beginning after November 15, ’08. (See story on next page.) Note: Hedge Trackers will provide training on FAS 161 disclosures on Dec. 15, ’08. (See more on our website: www.hedgetrackers.com)
- FAS 133r in low gear. The initial FASB effort to fast-track the overhaul of FAS 133 (FAS 133r) has been sidetracked. The project was folded into a broader conversion effort with the IASB.
- Watch out for non-performance risks. FAS 157 requires companies to include nonperformance risk in calculating hedge effectiveness. As highly rated counterparties are downgraded, swollen or simply go bankrupt, companies with derivatives in asset positions may see a significant impact on fair value resulting in ineffectiveness in hedges.
- The risk of (il)liquidity. The credit markets contraction created FX and IR pricing anomalies. Typically, inefficiencies would have quickly evaporated via arbitrage. Not this time. A frozen interbank market has prevented active trading.