01-05-2012, 11:17 PM

Hey guys,

I am new to this forum and would like some help with an accouting issue I have gotten stuck with.

The bank in which I work has floating interest rate exposure to future interest cashflows on its long term debt. In order to hedge that interest rate risk on these expected floating interest rate payments, we have opted to go for swaptions.

Now conventionally speaking, we could have purchased payer swaptions, and if in-th-money for us, we could have excercised them at the strike rate and entered in to a pay fixed-receive floating swap for the next 10 years. As per my understadning, this swaption would qualify as a hedging instrument (cashflow hedge) whereby any FV change in the swaption is recoreded in equity, except for the time-value of money of the option which will be expensed as it nears its excercise date. If excercised, we would have the swap FV as at excercise date recorded in equity, otherwise, if not excersied, it will be reversed out from equity and asset/liability.

Instead of the above, we SOLD receiver swaptions, so basically, at expiration if the counter party chose to excercise them, we would take the pay-fixed receive-floating side of the swap. As per IFRS, written options cannot qualify as hedging instruments, thus we have been recognizing any FV change in the swaptions (time-value and underlying swap) to income statement.

The qeustion is, we are currently out of the money, with $10M already booked as trading loss. At expiration date (assuming rates remain steady), we expect the counterparty to excercise the swaption. Once excercised, we would enter into a a pay-fixed receive-floating swap, which would qualify as cashflow hedge. The QUESTION is; as at expiration date, the underlying swap has a negative fairvalue on our books (time value of option is zero), that has been recognized as loss, now since its a cashflow hedge, should we start taking any future FV changes after expiration date to equity, or can we also move the current accumalated fair value loss of the swap (as at expiration date) to equity, thereby zeroing the FV change impact on the income statement, and recognizing the whole loss in equity directly?

I am new to this forum and would like some help with an accouting issue I have gotten stuck with.

The bank in which I work has floating interest rate exposure to future interest cashflows on its long term debt. In order to hedge that interest rate risk on these expected floating interest rate payments, we have opted to go for swaptions.

Now conventionally speaking, we could have purchased payer swaptions, and if in-th-money for us, we could have excercised them at the strike rate and entered in to a pay fixed-receive floating swap for the next 10 years. As per my understadning, this swaption would qualify as a hedging instrument (cashflow hedge) whereby any FV change in the swaption is recoreded in equity, except for the time-value of money of the option which will be expensed as it nears its excercise date. If excercised, we would have the swap FV as at excercise date recorded in equity, otherwise, if not excersied, it will be reversed out from equity and asset/liability.

Instead of the above, we SOLD receiver swaptions, so basically, at expiration if the counter party chose to excercise them, we would take the pay-fixed receive-floating side of the swap. As per IFRS, written options cannot qualify as hedging instruments, thus we have been recognizing any FV change in the swaptions (time-value and underlying swap) to income statement.

The qeustion is, we are currently out of the money, with $10M already booked as trading loss. At expiration date (assuming rates remain steady), we expect the counterparty to excercise the swaption. Once excercised, we would enter into a a pay-fixed receive-floating swap, which would qualify as cashflow hedge. The QUESTION is; as at expiration date, the underlying swap has a negative fairvalue on our books (time value of option is zero), that has been recognized as loss, now since its a cashflow hedge, should we start taking any future FV changes after expiration date to equity, or can we also move the current accumalated fair value loss of the swap (as at expiration date) to equity, thereby zeroing the FV change impact on the income statement, and recognizing the whole loss in equity directly?