Oanda corporation Revision 5

Hedge Testing 

Hedge Effectiveness Assessment: A forex hedge effectiveness assessment will be determined and 

documented when the forex hedge is designated for hedge accounting treatment. The documentation 

should consider how the critical terms of the hedged item and the forex hedge match up, especially the 

amounts and the timing (expected foreign currency payment/receipt date as compared to the expiry date 

of the forex hedge). Further, the counterparty risk must be considered as part of the assessment.  

Forecasted transactions must meet the high probability requirement. For example, the assessment 

should include a clause such as, ―no ineffectiveness is anticipated because the notional amount and the 

maturity date of the carry spot trade hedge matches with the forecasted accounts payable balance and 

due date.‖ 

 Hedge Effectiveness Measurement: Subsequent to the hedge designation, hedge effectiveness must 

be measured at each reporting date. That is, the change in foreign sales value, when converted to the 

reporting currency, will be offset by the cumulative change in value of the forex hedge, assuming that a 

hedging relationship is documented and proven.  

If a cash flow hedge is not documented or not effective (that is, outside an effective range of 80% to 

125%), then changes in the forex hedge's value will flow through earnings. Consult your auditor on 

acceptable hedging effectiveness ranges and methods for proving their success.  

The method of documentation has an impact on determining the effective hedge amount. For example, 

a carry spot trade hedge is designated as the hedge of a forecasted sale and effectiveness will be 

assessed based on the spot rates. Assuming the forecasted sale occurs as anticipated, there is no 

ineffectiveness recorded to the income statement related to the change in spot rates. Interest carry costs 

will also be recorded to the income statement.  

An alternative example: if the forward contract is designated as the hedge of a forecasted sale, the 

effectiveness is assessed based on the forward rates. Assuming the forecasted sale occurs as anticipated, 

there is no ineffectiveness recorded to the income statement  

 

---