International Finance and Accounting Handbook

rency-equivalent cash flows, calculated on a forward rate basis, attributable to
changes in the JPY/USD foreign currency exchange rate.

Hedge Instrument
For this Hedge Relationship, Parent designates the following foreign currency for-
ward contract as the Hedge Instrument:

Trade Execution Date: January 2, 200X

In the Name of: HedgeCo

Counterparty: XYZ Bank

Notional Amounts: PY 3,300,000,000 against USD 30,275,229.36

Forward Rate: JPY 109.00/USD

Maturity Date(s): April 30, 200X

Contract Type: Forward contract to sell JPY/buy USD

HedgeCo Contract Number: 101

Period for the Retrospective Effectiveness Test
HedgeCo will perform, as discussed below, the Retrospective Effectiveness Test
quarterly.

Prospective and Retrospective Effectiveness Test/Measurement of Ineffectiveness
The critical terms of the Hedged Item and the Hedge Instrument are identical:

• The notional amount of the Hedge Instrument equals the notional amount of the
  Hedge Item.


• The maturity date of the Hedge Instrument is in the month that the Hedge Item
  is forecasted to occur.


• The currency pair of the Hedge Instrument and the Hedged Item’s Hedged Risk
  are the same (i.e., JPY/USD).

In addition, the change in the fair value of the Hedged Instrument will be assessed
based by HedgeCo on changes in fair value attributable to changes in forward ex-
change rates calculated on a net present value basis using the LIBOR swap curve.
The change in the fair value of the Hedged Item’s Hedged Risk will also be assessed
based by HedgeCo on changes in fair value attributable to changes in forward ex-
change rates calculated on a net present value basis using the LIBOR swap curve. In
other words, for HedgeCo’s assessment of hedge effectiveness, the calculation of the
changes in the fair value of the Hedge Instrument is identical to the calculation of the
change of the fair value of the Hedged Item’s Hedged Risk.

Assumption of No Ineffectiveness
Thus, in accordance with FAS 133, paragraph 65, HedgeCo assumes automatic effec-
tiveness of the Hedge Instrument designated as a cash flow hedge of the Hedged Item’s
Hedged Risk, and will not conduct effectiveness testing of this Hedge Instrument nor
measure any hedge ineffectiveness during the life of this Hedging Relationship.

Quarterly Accounting
However, in accordance with the requirements of Statement No. 133 Implementation
Issue G9, HedgeCo will verify at each quarterly assessment testing date that the crit-
ical terms of the Hedging Relationship have remained the same.

APPENDIX 19 • 21