A software company implemented an interest rate hedging strategy utilizing a combination of interest rate swaps and interest rate caps. Despite being privately held, management and the private equity owners wanted to insulate the business from monthly income statement volatility caused by changes in mark-to-market valuations of these hedges.
- Provide access to independent mark-to-market valuations for the hedges;
- Provide the initial hedge designation memorandum, including identifying the risks, the means for hedging those risks, the methodology for measuring hedge effectiveness and the initial back testing to demonstrate the effectiveness of the hedging strategy;
- Work with the company’s auditor to obtain sign-off on the hedge accounting strategy and process.
Results & Recommendations
The client received hedge accounting treatment on all its interest rate swaps, in addition to the daily valuation for both the swaps and caps.