FXTalking Shop

Talking Shop: Digging Into Dual-Purpose Hedges and De-designation

By August 12, 2021No Comments

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Member question: “Does anyone have dual-purpose hedges (for example, the hedge is originally a cash flow (CF) hedge and then intentionally de-designated to become a balance sheet hedge, with impact after de-designation going to the P&L)?”

Peer answer 1: “Yes, we’ve recently switched to a long haul approach and are now de-designating our CF hedges. Due to the timing mismatch between the two programs, I wouldn’t necessarily say we have interplay/dual purpose.”

Peer answer 2: “We do exactly what you have described; our FX cash flow hedges get de-designated when the revenue/ expense is booked, but the hedging instruments that remain on the books are hedges of [FX-denominated] AR/AP created when the revenue/expense was booked.”

Peer answer 3: “Yes, we do what you describe. We hedge the purchase of our inventory, but the hedge matures generally a month later when the product is paid for and we have a cash reimbursement of an intercompany.

  • “We de-designate our cash flow hedges the month-end prior to maturity, such that the remaining P&L goes through a different P&L item.”

Peer answer 4: “We do what you describe. For important currency pairs, we true up the hedge amount once de-designated to match the actual balance sheet exposure.”

Peer answer 5: “We did that as part of our project CF hedging program at [another company]. We used Chatham Direct to handle the handoff between CF and balance sheet programs. Their tool made it quite smooth.”

Peer answer 6: “​Yes, we de-designate the hedges and then they mature; or we enter into trades to close them out the next month.  We hedge quarterly but de-designate monthly.”

Justin Jones

Author Justin Jones

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