Hedge explained Hedging Hedging Section Overview Enterprise risk management practice, often use hedging methods. For example, foreign-invested enterprises own use foreign exchange forward contracts lock the exchange rate against exchange rate risk; state-owned enterprises approved by the relevant departments to engage in domestic and overseas commodity futures to lock in the price of risk are identified as the use of hedging. &quot;Accounting Standards for Enterprises No. 24 - Hedging&quot; (hereinafter referred to as hedging criteria) specification of the company&#39;s hedge accounting treatment of business, to better reflect its risk management, corporate hedging operations and financial condition overall impact, facilitate the investor to the enterprise risk management strategy and comprehensive evaluation of the level of risk management. Improve enterprise risk prevention. First, the concept of hedging Hedging refers to the enterprises to avoid foreign exchange risk, interest rate risk, commodity price risk, equity price risk, credit risk, specify one or more sets of tools to make hedging instruments, changes in fair value or cash flows, expected to offset all or part of the hedged item in fair value or cash flows. Corporate hedging in commodity futures, its hedging strategy is usually to buy (sell) and a considerable number of the spot market, but trading in the opposite direction of the futures contract, with a view to a future time by selling (buying) futures contracts to compensate for changes in the spot market price risk arising from the actual price. Compared to non-financial corporations, financial companies face more financial risks, such as interest rate risk, foreign exchange risk, credit risk, the hedging demand more. For example, a listing of banks to hedge exchange rate risk, foreign currency and exchange payment options contracts signed on the existing large amount of U.S. dollars to hedge exposure. Second, the classification of hedge For the application of hedge accounting, hedging (hereinafter referred to as hedging) An Tao of relationships (ie, the hedging instrument and the relationship between the hedged item) can be classified as fair value hedging, cash flow hedges and net investment abroad hedging. (A) fair value hedging, is a recognized asset or liability or unrecognized firm commitment, or the assets or liabilities, unrecognized firm commitments, changes in the fair value of identifiable part of the hedging of risk. Such changes in value attributable to a particular risk and could affect profit or loss. The following are examples of fair value hedging: 1. A business-to-fixed interest rate liabilities assumed changes in the fair value of hedging risk. 2. Airways signed a three months later to a fixed amount of foreign currency contracts to purchase the aircraft (not sure of the firm commitment), in order to avoid foreign exchange risk to the firm commitment of the foreign exchange risk hedging. 3. Power Company signed a 6 months after the purchase of coal fixed price contracts (not sure of the firm commitment), to avoid the risk of price changes, price changes for the firm commitment of hedging risk. (B) Cash flow hedging, changes in cash flow refers to the risk of hedging. Such changes in cash flow from a recognized asset or liability, it is probable forecast transaction related to a particular risk and will affect the profit or loss. The following are examples of cash flow hedge: 1. Enterprises bear a floating rate debt exposure to changes in cash flow hedging. 2. Airways to avoid expected after 3 months is likely to occur with the purchase of aircraft-related changes in cash flow hedging risk. 3. Commercial banks to 3 months after the forecast is likely to occur with the disposal of available for sale financial assets, cash flows related to changes in risk hedging. Determine the commitment of the foreign exchange risk hedging, corporate cash flow can be used as hedging or fair value hedging. (C) net investment hedging foreign operations, is operating on the net investment in foreign exchange risk hedging. Net investment in foreign operation, an enterprise operating in the foreign share of net assets in equity. Enterprise neither planned nor likely in the foreseeable future accounting period settlement of long-term foreign currency monetary receivables (including loans), net investment in foreign operation should be regarded as an integral part. From selling goods or services to the formation of shorter-term accounts receivable does not constitute a net investment in foreign operations. Hedging criteria are related to the hedging instrument and hedged item&#39;s condition, the use of hedge accounting conditions, as well as fair value hedging, cash flow hedge, net investment in foreign operation hedge accounting provisions. ? Section II of the hedging instrument and hedged item One set of tools (A) can be used as hedging instruments, financial instruments Hedging instrument, is an enterprise designated for the purpose of hedging, and its fair value or cash flows expected to be offset by the hedged item&#39;s fair value or cash flows of derivatives, hedging foreign exchange risk can also be non- or non-derivative financial assets derivative financial liabilities as a hedging instrument. 1. Derivatives can often be used as a hedging tool. Derivative instruments including forward contracts, futures contracts, swaps and options, as well as with forward contracts, futures contracts, swaps and options in one or more features of the tool. For example, an enterprise to avoid the risk of falling prices of copper stocks, you can sell a certain number of copper futures contracts. Among them, the copper futures contract is a hedging instrument. However, certain derivative instruments can not effectively hedge the risk of the hedged item can not be used as a hedging tool. For example, the company issued options can not be used as a hedging tool. Because of the potential loss of the option may greatly exceed the potential profits of the hedged item, which can not effectively hedge the risk of the hedged item. And this difference is that the party purchased options may incur a loss is the most premium, could claim the profits usually equal to or significantly more than the potential of the hedged item lost, and therefore purchased option of the party may purchased options Zuowei hedging instrument. To this end, the provisions of hedging criteria, the upper and lower limit for the right interest rate, or by an issue of options and option component of a purchased option, which is equal to the Company issued an option (that is, companies received a net options fee), can not be designated as a hedging instrument. 2. Non-derivative financial assets or non-derivative financial liabilities are generally not used as a hedging tool, but the hedged risk as foreign currency risks, certain non-derivative financial assets or non-derivative financial liabilities can be used as a hedging instrument. For example, certain foreign currency loans as of the same kind of sales denominated in foreign currencies (OK) commitment to hedging tools; another example, can be held to maturity investments as a hedge against foreign exchange risk hedging tool. 3. Whether derivatives or certain non-derivative financial assets or non-derivative financial liabilities as a hedging instrument is its fair value of the basic conditions should be able to be measured reliably. Therefore, in an active market does not offer the rights instrument investment, and with the equity instrument and must be settled by delivery of equity instruments settled in the derivative instruments, because of its fair value to be reliably measured, Bu Neng as a hedging instrument. Enterprise&#39;s own equity instruments of financial assets are neither corporate non-financial liabilities, and therefore can not be used as a hedging tool. 4. In the use of hedge accounting, only the outside of the main body of the report involved the tools (including derivative instruments or non-qualified or non-derivative financial assets, derivative financial liabilities) can be used as a hedging tool. Here, the body of the report that business groups or enterprises within the group, also refers to the various divisions to provide segment information. Therefore, in the division or company within the Group financial statements, only those divisions or companies involved in the subject other than the related hedging instruments and designated to meet the hedging criteria in the conditions of application of the provisions of hedge accounting method, and In the Group consolidated financial statements, if the hedging instrument and the related set of designated outside the group is not involved in the subject, you can not use hedge accounting for its processing. (B) on the designated hedging instrument l. enterprises set of tools to measure, it is usually targeted to the tool as a whole, using a single measured at fair value based Duiqi; the same time, lead to changes in fair value hedging instrument factors are interlinked, therefore, business it should be a whole or a certain percentage (for example, the nominal amount of 50%) designated as a hedging instrument. However, because the intrinsic value of the option premium and long-term contract can often be measured separately, to increase certain 套 facilitate the strategies of the effectiveness, hedging criteria Yunxuqiye Zai right set of tools Zhiding O&#39;clock, on long-term options Hu contract to make an exception, namely: for options, enterprises can be the intrinsic value of options and the time value of separation, only the intrinsic value of changes in the options as a hedging instrument; for forward contracts, corporate long-term contract can be of interest and that separation of the price, only price changes on the spot to forward contracts designated as hedging instruments. 2. Enterprise will normally be a single derivative instrument designated as hedging against a risk, but also meet the following conditions may also be designated on more than one set of risks: (1) of the hedged risk are clear and identifiable; (2) the effectiveness of hedging can be proved; (3) can ensure that the risk of derivatives positions and different relationship between the specific designation. Among them, the effectiveness of hedging is the hedging instrument&#39;s fair value or cash flows to offset the hedged risk of the hedged item changes in fair value or cash flow levels. For example, a company&#39;s functional currency is the renminbi, take a 5-year U.S. dollar floating rate debt. To avoid the financial liability of the foreign exchange risk and interest rate risk, a company with a financial institution may enter into a cross currency interest rate swap contracts, so that the swap contract, the terms and provisions of the financial liabilities &quot;match&quot;, and the swap contracts designated as hedging instruments. Under the swap contracts, a company can receive a regular basis in U.S. dollar floating rate of interest determined at the same time pay a fixed interest rate determined by the RMB interest. 3. Enterprises can be two or more derivatives or a combination of a certain proportion of the portfolio designated as a hedging instrument. The foreign exchange hedging, business can be two or more combinations of non-derivative or a percentage of the portfolio, or derivatives and a combination of non-derivative or a certain proportion of the portfolio as a hedging instrument. 4. Business although the overall set of tools can be a certain proportion of the hedging instrument, but not in the hedging relationship will be the remaining term of the hedging instrument to hedge a certain period specified. For example, a company has a fixed interest payment, charge a floating interest rate swap contracts, intended to be used on floating rate notes issued by hedging. The exchange of the remaining contract period of 10 years, while the bond&#39;s remaining period of 5 years. In this case, a company can not swap the remaining contract period of 5 years will be a swap designated as a hedging instrument. Second, the hedged item (A) can be used as a hedged item in the project Hedged item, is an enterprise faced changes in fair value or cash flow risk, and is designated as a hedged object of the following: (1) The individual has been identified assets, liabilities, firm commitments, highly probable forecast transaction, or outside business net investment; (2) a group with similar risk characteristics of recognized assets, liabilities, firm commitments, highly probable forecast transaction or net investment in foreign operations; (3) sharing the same interest rate risk hedged financial assets or financial liabilities part of portfolio (only applicable to fair value interest rate risk hedging portfolio). Among them, the firm commitment, refers to a specific future date or period, to exchange a specific amount of resources agreed upon price, legally binding agreements; forecast transaction is expected to occur but have not yet committed to the transaction. The following terms help to understand the hedged item: 1. As a hedged item, should be the fair value of the enterprise or are facing the risk of changes in order flow (ie the hedged risk), in the current or future periods will affect the profit or loss. Associated with the hedged risk, often including foreign exchange risk, interest rate risk, commodity price risk, equity price risk, credit risk. General business risk business (such as the risk of damage to fixed assets, etc.) can not be the hedged risk, because these risks can not be specifically identified and measured separately. Similarly, business combination transactions, and firm commitments to purchase another business-related risks (excluding foreign exchange risk) also can not serve as the hedged risk. 2. Derivative instruments not be used as a hedged item, but for outsourcing, embedded in another financial instrument (main contract) options, if the existence of close ties with the main contract, and the hybrid instrument is not designated as at fair value and their changes were current profit and loss account for financial instruments, you can as a hedged item. 3. For the credit risk or foreign exchange risk, companies can be held to maturity investment as a hedged item, and for interest rate risk or prepayment risk, not as a hedged item. 4. Using the equity method equity investment in the fair value of hedging can not as a hedged item, because the equity method, the investors just in joint ventures or joint venture share in the profit and loss recognized as the current profit and loss, but not recognized investment changes in fair value. With similar consolidated financial statements in the parent company of subsidiary investment can not serve as a hedged item, but net investment in foreign operations as a hedged item, because the relevant designated for hedging foreign exchange risk is not Foreign net operating risk of changes in fair value of investments. 5. In the use of hedge accounting, only the outside of the main body of the report related to the assets, liabilities, firm commitments or highly probable forecast transaction to as the hedged item. Therefore, the constituent companies within the group companies or divisions between the sets of activities, only the component business division, a division of financial statements or reports the hedging accounting methods, not in corporate finance merger be reflected in their statements. However, in enterprise group consists of two enterprises or between two branches of foreign currency trading foreign currency monetary items forming (for example, foreign currency receivables), if the foreign currency exchange gains and losses can not offset each other, you can in the enterprise Group consolidated financial statements for the use of hedge accounting. (Cancel section), for example, in accordance with &quot;Accounting Standards for Enterprises No. 19 - Foreign Currency Translation&quot; requirement, when the business group&#39;s two affiliated companies with different functional currency, they formed between the receivable (payable ) foreign exchange gains and losses resulting amount is usually not fully offset. Similarly, companies within the group between the two affiliates is probable forecast transaction, according to the subject of the transaction denominated in currencies other than the functional currency (ie foreign currency denominated), and the related foreign exchange risk will affect consolidated profit or loss, and the very probable forecast transactions (foreign exchange risk) can be consolidated financial statements as a hedged item. (B) Designation of the hedged item 1. Will finance the project designated as a hedged item For financial assets or financial liabilities, be designated as a hedged item with more options. As long as you can identify the hedged risk and hedging effectiveness can be measured only with the financial assets or financial liabilities at fair value or cash flows as part of the risks associated with both can be used as the hedged risk. Accordingly, the related financial asset or financial liability can be designated as a hedged item. For example, an interest-bearing financial assets or financial liabilities, all interest rate risk and can be measured separately identifiable part (such as risk-free interest rate component), it can be used as the hedged risk associated with financial assets and financial liabilities can be specified as a hedged item. Financial assets and financial liabilities designated as cash flow as part of a hedged item, the designated portion of the cash flow should be less than the financial assets or financial liabilities the total cash flow. However, companies can only in respect of a specific risk (LIBOR changes in the risk of the formation, etc.), the overall financial assets or financial liabilities designated all cash flows. For example, suppose an enterprise has a real interest rate of LIBOR-1% of interest-bearing financial liabilities, its debt could not be determined by the principal and interest to LIBOR is designated as a hedged item, nor can-l% designated as a hedged item, However, enterprises may LIBOR financial liabilities arising from changes in the overall (ie, principal and debt to determine LIB0R-1% interest) change in fair value or cash flows, the overall financial liabilities designated as a hedged item. The combination of financial assets or financial liabilities the fair value of interest rate risk hedging (also limited to this set of issues), business can be a currency (such as RMB, U.S. dollars or euro amount) rather than individual asset or liability is designated as a hedged project, and part of the interest rate risk associated with hedging. In risk management practice, a portfolio may include both financial assets and financial liabilities are included, but the specified amount of money should be reflected as assets or liabilities. 2. The non-financial items designated as a hedged item Under normal circumstances, difficult to distinguish between business and non-financial items and measurement of specific risks (excluding foreign exchange risk) related to changes in fair value or cash flows. Therefore, the enterprises in the non-financial assets or financial liabilities designated as a hedged item, the corresponding hedged risk is limited and the non-financial assets or financial liabilities or risks related to foreign exchange risk of all. For example, a company expects a number of tires purchased from B. Company A and Company B&#39;s functional currency into U.S. dollars and RMB, respectively. As the tire non-financial items, a company can only be with the tire or in which all the risks related to foreign exchange risk is designated as the hedged risk. However, a company can not be expected to purchase the tire rubber components contained in the cost of change in risk is designated as the hedged risk. 3. The combination of a number of projects designated as a hedged item With similar risk characteristics of the asset or liability hedging portfolio, the portfolio of each individual asset or liability shall also bear the hedged risk, and that the individual within the portfolio of financial assets or financial liabilities of the individual from the hedged risk in the fair changes in value, should be expected with the combination from the hedged risk in the fair value changes in proportion to the total. For example, when the hedged portfolio hedged risk due to the formation of changes in fair value of 10%, the combination of the individual financial assets or financial liabilities, single form for the hedged risk should be limited to changes in the fair value of 9% to 11% smaller range. By comparing the effectiveness of hedging is hedging tool (or a group of similar hedging instruments) and the hedged item (or group of similar hedged items) of the fair value or cash flows and determined, therefore, the use of sets method of accounting, business can not form of financial assets and financial liabilities, net position designated as a hedged item. For example, enterprises can not be fixed with a similar period of fixed interest rate financial assets and financial liabilities designated as the net position of the formation of a hedged item. In this case, companies can often achieve through other means to avoid the risk of almost the same effect. For example, a commercial bank has to bear similar risks and maturities of financial assets and financial liabilities were 100 million yuan and 90 million yuan, the net position between the formation of 1 0 million yuan. In this regard, the commercial banks can only be the total financial assets of 1 0 million yuan designated as a hedged item. Further, if the related assets and liabilities are fixed-rate project, and the corresponding set of fair value hedging relationship; if floating-rate project, then the corresponding set of cash flow hedging relationship. ? ?