1. Best Practices For Your
Hedge Program
Helen Kane: Founder & President
6/15/2011

2. Agenda Introduction
Hedging Definition
Exposure Identification
Instruments
Hedge Relationships
Execution
Accounting
Valuation
Disclosures
Performance Reporting
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

3. Introduction – Helen Kane
Founder and President of Hedge Trackers
Hedge Trackers, LLC provides practical,
solutions to exposure management and
hedge accounting challenges
Direct experience implementing hedge programs
and outsourcing derivative accounting for
global corporations for over a decade
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

4. Services
Currency Risk
• Consulting: hedge program implementation
and accounting
• Outsourcing: derivative accounting
AcappellaFX (SAAS) derivative accounting
Interest Rate Risk
• Consulting: derivative accounting
• Outsourcing: derivative accounting
Commodity Risk
• Consulting: derivative accounting
• Outsourcing: derivative accounting
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

5. Hedge
Hedging versus trading
• Hedging: using derivatives to
• Limit risk on existing exposures
• Exchange less desirable risk for more desirable
risk
• Floating interest rate for fixed interest rates
• Euro cash inflows for USD cash inflows
• Floating commodity purchase prices for fixed
• Trading: using derivatives to
• Create profits from market movements
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

6. Exposure Identification
Requirement to identify and quantify market
risk exposures that impact normal business
operations
• Economic Exposure
– Exposure to market risk that impact the
company’s cash flows
• Accounting Exposure
– Exposures reflected in company financial
statements by application of GAAP
– May/may not be economic
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

7. Exposure Identification – Best Practices
Document exposure trail through P&L, BS and
Cash Flow statement on detail basis
Centralize exposure identification/ collection
/data mining
• Technical, focused resource(s)
• Identify entity short/long and net global position
Identify opportunities to naturally hedge
Centralize exposure location(s) when viable
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

8. Exposure Identification – Best Practices
Network
• Reach into operations to develop data sources
• Exchange data with FP&A
• Share
– Make hedge information valuable to operations
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

9. Exposure Identification – Controls
Ensure that exposures identified for hedging
are economic
• Validate currency exposures with cash
• Shadow balances
• Intercompany tax structures
• USD held in Foreign Functional Subs
• Monitor the quality of data submissions
• Anticipated transactions
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

10. Instruments
Forward/futures/swap contracts are used in
hedging
• To lock in (fix) fluctuating values
Use forward to fix USD value of JPY anticipated costs or
payables
Use interest rate swap to fix % paid on revolver debt
• To return a fixed value to floating at market
Use futures to return gold held in inventory to market
price until sold
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

11. Instruments
Plain vanilla options are used in hedging
• To insure against costs rising
Use option to protect LIBOR based interest payments on
debt from exceeding X%
Use option to protect natural gas costs in manufacturing
plant from exceeding X per MMBtu
• To insure against revenue values dropping
Use option to protect USD value of EUR revenue from
dropping below X
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

12. Instruments – Best Practices
Increase corporate trader “sophistication”
Align instrument tenor with expected cash flows
Evaluate instrument types for “Special Hedge
Accounting” qualification
Inform accounting organization when new
derivatives contemplated
Train management to understand that losing
money on “hedge” is generally good news for the
business
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

13. Contrast Current Practice with Proposed Practice
Current Practice
8M month * 12 months = 96M
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

14. Contrast Current Practice with Proposed Practice
Proposed Program
EUR2-4M a month, EUR8M outstanding each month
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

15. Instruments – Controls
Ensure accounting has ability to reliably
value the instruments
Credit effecting of derivatives greatly increasing
difficulty of valuations
Segregate trading from confirmation and
accounting
Appropriate signature authority and
disclosures when financing derivative
purchases (participating forwards)
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

16. Hedge Relationship – Best Practices
Solid understanding of how underlying
transaction is executed/priced and how flows
through financial statements
Ensure that instrument type is appropriate to
meet hedge objective
• Effectiveness testing – contemplate economic
(not just accounting) effectiveness
• Match tenor to risk profile
• Notional hedged annually closely reflects
exposure transactions (not balances) for the
year
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

17. Hedge Relationship – Controls
Instrument notional < exposure
• Monitoring of hedged item vis a vis derivative(s)
• Reflected change in hedge when underlying
exposure changes
• Capture when exposure changes and rates that
govern that change
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

18. Trade Execution
Counterparty business model: buy low, sell high
Counterparties execute trades with varying credit
arrangements
• Virtually no credit risk
• exchange
• broker (bilateral posting of collateral)
• Credit relationship: increasing ISDA language
with unilateral or bilateral credit calls
• banks
• banks with broker/trading firm intermediary
• broker
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

19. Execution – Best Practices
Pricing of derivatives reflects
• Sophistication of buyer
• Complexity of structure (transparency)
• Access to pricing information
• Transaction size
• Access to the market
• Liquidity (depth of market, market drama)
• Accounting responsibility understands derivative
and hedge relationship
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

20. Execution - Controls
Pricing visibility
Authorized Instrument
Authorized Trader
Authorized Counterparty
Confirms sent directly to accounting
responsibility
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

21. Accounting
All derivatives require
• Identification
• Fair Valued
• Recorded as asset/liability (few scope exceptions)
• Special hedge accounting supported by
qualification of hedged item and appropriate
documentation
• Inception & ongoing basis
• Disclosure
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

22. Accounting – Best Practices
Are all derivatives on the books at fair value
• Independent valuations
Use market models and inputs
Beware of inefficient markets (prices) at year end
Contemplate own & counterparty credit in valuation
• Understand what they mean
• Understand the source
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

23. Accounting – Best Practices
Valuations
• Understand inputs and sources
• Monitor markets for changes in valuation
approaches
Credit effect derivatives
• discounting current position,
• discounting possible future positions
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

24. CDS Rates - 2010
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

25. 3M vs 1M LIBOR – 2010
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

26. Accounting – Best Practices
Process to identify “operational derivatives”
• Electricity/Natural Gas
• 3rd Currency contracts
Detailed mapping of hedged item transit through
the financial statements
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

27. Accounting – Best Practices
Special Hedge Accounting
• Detail description of hedged item per derivative
• Evaluation of all sources of ineffectiveness in
testing protocols
• R2, Bslope, T-test, analysis of y-intercept
• Like item analysis
• Details on measurement approaches
• Scenario analysis
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

28. Accounting – Controls
Education and sophistication in accounting to
provide appropriate and effective oversight
Direct receipt of confirmations
Validation of valuations
Monitor values in OCI
• Record of effectiveness testing
• Probability assessment
• Calculations: measurement of ineffectiveness
• Timing of reclassification to income
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

29. Disclosures
Requirement to provide quantitative and
qualitative disclosures about the hedge program.
Why and how hedging
How accounting for hedges and how monitoring
their effectiveness
“Tabular requirements”
Information about the volume of trades and
trade activity
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

30. Disclosures – Best Practices
Develop data capture and processes for translation
of quantitative derivative disclosures
Clearly discuss sources of exposure to company
and expectations of hedge program
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

31. Disclosures - Controls
Roll forward of OCI information related to cash
flow hedges
Distinguish between cash/non-cash timing of
derivative and hedge items
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

32. Performance Reporting
Reporting on the economic effectiveness of the
hedge program against economic objectives
• Distinct from accounting effectiveness
• Performance against net
• Meeting budget rate
• Delivering margin rate
• Addresses objectives
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

33. Performance Reporting – Best Practices
Take the mystery out of hedge results
Provide consistent and easy to understand
metrics and scorecards (graphs improve
communication with Sr. Management)
Align the objective with performance reporting
© 2010 Hedge Trackers, LLC This publication contains general information and does not represent the
rendering of accounting advice and is not a substitute for such professional advice or services.

34. Questions
www.hedgetrackers.com
408.350.8580
Silicon Valley | Chicago | Los Angeles

35. Answers
hkane@hedgetrackers.com
Hedge Trackers, LLC
Silicon Valley, Chicago, Los Angeles
(408) 350-8580
www.hedgetrackers.com