Other Papers and Articles
Using a PERCS-for-Common Exchange Offer to Reduce the Costs of a Dividend Cut
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Financial Engineering as a Solution to Interest-Rate Risk Management Challenges
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The PricewaterhouseCoopers Credit Derivatives Primer
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Russian Settlements Will Put Credit Derivatives to the Test
Opinion. Focuses on the credit derivatives used in Russia. Effectiveness as a risk management tool; Value of the instrument; Structures of credit derivatives; Legal documentation of credit derivatives; Issues in using credit derivatives.
Structuring Derivative Instruments to Adjust Risk Exposure: The Arithmetic of Financial Instruments
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Will Credit Derivatives Survive the Stress Test?
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Measuring Damages in Securities Fraud Class Action Lawsuits
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Securitizing Political Risk Investment Insurance: Lessons from Past Securitizations
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How to Test Hedge Effectiveness Under FAS 133
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Testing Hedge Effectiveness
SFAS 133, Accounting for Derivative Instruments and Hedging Activities, marked a large step forward in FASB's quest to record financial instruments at fair value. The new accounting for hedges can introduce some complexity into the financial statements that can be avoided if the hedge qualifies as a "highly effective" hedge. Applying the definition of such a hedge, however, is subject to debate. Three common methodologies for testing hedge effectiveness are presented and analyzed: the dollar-offset method, the variability-reduction method, and the regression method. The dollar-offset method, which is more sensitive to small changes, but also stresses the importance of examining all the specifics of the situation, is not recommended. SFAS 133 standardizes the accounting treatment for derivative instruments by requiring all entities to report derivatives as assets and liabilities on the balance sheet at their fair value. A case of a company that is considering hedging a purchase is used to illustrate the methods described.