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Chapter 5 — Foreign Currency Hedges

5.4 Net Investment Hedging

5.4 Net Investment Hedging

Hedging Relationship Type
Possible Types of Foreign-Currency-Denominated Hedged Items (See ASC 815-20-25-28)
Permitted Hedging Instruments
Net investment hedge
Net investment in a foreign operation
Derivative or nonderivative

Footnotes

2
The terms of the hypothetical derivative should reflect those of a receive-fixed-rate, pay-fixed-rate cross-currency interest rate swap that has (1) a fair value of zero at hedge inception and (2) terms (other than the notional amount and fixed interest rate on the leg whose interest payments are not denominated in the functional currency of the designated hedged net investment) that match those of the actual hedging derivative (e.g., maturity date, repricing, and payment frequencies of any interim settlements). Furthermore, the notional amount of the leg of the hypothetical swap denominated in the functional currency of the net investment being hedged should match the amount of that hedged net investment. The notional amount of the leg that matches the hedging entity’s functional currency would be set by converting the foreign-currency-denominated leg on the basis of the current foreign exchange rate (i.e., the spot foreign currency exchange rate at hedge inception). The interest rate on the functional currency leg would then be set at whatever rate results in the swap’s having a fair value of zero at inception of the hypothetical derivative.
3
This element can be determined by looking at the difference between the payments on the off-market (actual) swap and the payments on the at-market (hypothetical) swap. The difference between the fair value of the swap and the undiscounted “extra” payments is the interest element that would be amortized out of CTA on a systematic and rational basis in a manner consistent with the treatment of other excluded components under the amortization approach.
4
See Sections 3.5.1.3.1 and 4.1.5.1.3.1 for a discussion of partial dedesignations for fair value hedges and cash flow hedges. The concepts are similar for a net investment hedge, as supported by ASC 815-35-55-1.