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A theory of interest rate swap overhedging

Article Information:

Title:

A theory of interest rate swap overhedging

Author(s):

Angela L.J. Hwang, Robert E. Jensen

Journal:

Managerial Finance

Year:

2005

Volume:

31

Issue:

9

Page:

63 - 82


ISSN:

0307-4358


DOI:

10.1108/03074350510769875

Publisher:

Emerald Group Publishing Limited

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Abstract:

This paper explains the concepts of underhedging and overhedging in interest rate swaps and demonstrates how overhedged and underhedged swaps might be accounted for under Statement of Financial Accounting Standards No. 133 (FAS 133) and international Accounting Standard No. 39. To illustrate, we use an interest rate swap with receive-fixed, pay-fixed swap leg foreign currency to explain the un derlying differences between overhedging and underhedging on foreign exchange risk. We further clarify that when both legs of an interest rate swap are specified with the same currency as in the situation of FAS 133 - Example 5 beginning in Paragraph 131, accounting for overhedging or underhedging will be no different because there is no foreign exchange overhedging or underhedging risk that impacts swap valuation.

Keywords:

Accounting for derivative instruments, FASB 133, Hedge accounting, IAS 39, Overhedging


Article Type:

Research paper


Article URL:

http://www.emeraldinsight.com/10.1108/03074350510769875

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