IFRS 9 Cashflow Hedges Credit Risk Dominating Value changes

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DaPoppins
Posts: 6
Joined: 01 Mar 2023, 13:53

IFRS 9 Cashflow Hedges Credit Risk Dominating Value changes

Post by DaPoppins »

All,

I have a question on how to test for hedge effectiveness when it comes to "credit risk dominating value changes'. I can see we can make qualitative arguments, but wondering how to have a quantitative basis for better appreciation of guidance. For example:

Hedging Instrument: Discount rate 9% (3% adjustment due to credit risk); Change in fair value of of derivative: $A
Hedged Item (forecast transaction): Discount rate 6%; Change in fair value of hedged item: $B

Does the guidance simply means: value change due to credit risk = magnitude of ($A-$B) < value change in hedged item magnitude of ($B)?

Also practically speaking when does this situation arise: could it happen in low interest rate environment (vs high rate environment) when discount rates are low (and thus changes in credit risk will cause greater variation in value changes?)

Thank you.

DaPoppins
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