U.S. Tax Documentation Requirements
Optimal documentation to be filled in by HedgeCo’s Tax Department.
B. PERFECT INTEREST RATE SWAP FAIR VALUE HEDGE
Documentation preparation date: December 31, 200X
Risk Management Objective and Strategy
General International, Inc. (HedgeCo), a U.S. dollar (USD) functional currency en-
tity, has a six-year USD 100,000,000 fixed-rate note (Fixed Debt), and thus is ex-
posed to variability in expected future fair values of the debt as a result of long-term
USD interest rate movements. In accordance with HedgeCo’s risk management strat-
egy, HedgeCo’s risk management objective is to reduce the variability in the fair
value of its fixed-rate debt that are caused by changes in long-term interest rates. This
objective is met by entering into a pay floating/receive fixed interest rate swap that
effectively stabilizes the fair value of the Fixed Debt.
Type of FAS 133 Hedge
Fair value.
Hedged Item
For this Hedge Relationship, General International designates as the hedged item all
the fixed interest flows of the fixed debt that bears interest at % p.a., payable on
June 30 and December 31 for the years 200X+1 to 200X+6, with payment of the
principal amount due on December 31, 200X+6.
Hedged Item’s Hedged Risk
For this Hedge Relationship, HedgeCo designates the above Hedged Item’s Hedged
Risk as the risk of changes in the net present value of Hedged Item’s fair value, cal-
culated by present valuing the interest flows using a LIBOR swap curve, attributable
to changes in LIBOR interest rates, the designated benchmark interest rate.
Hedge Instrument
For this Hedge Relationship, HedgeCo designates the following interest rate swap as
the Hedge Instrument:
Trade Execution Date: December 31, 200X
In the Name of: General International, Inc.
Counterparty: XYZ Bank
Notional Amount: USD 100,000,000
Pay Floating LIBOR Rate Six-Month LIBOR
Receive Fixed 6.5% [N.B.: there’s no need to match the fixed rate]
LIBOR Reset Dates: June 30 and December 31
Maturity Date: December 31, 200X+6
Contract Type: Interest Rate Swap
HedgeCo Contract Number: 102Period for the Retrospective Effectiveness Test
HedgeCo will perform, as discussed below, the Retrospective Effectiveness Test
quarterly.
87 819 • 22 FAS 133: ACCOUNTING FOR DERIVATIVE PRODUCTS