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Saturday, 13th April 2024
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IAS 39 changes hedging strategies Back  
Corporate treasurers are turning to vanilla products.
Companies adopting IAS 39, commonly known as the ‘derivatives standard’, are moving away from exotic structures in favour of more vanilla products such as forwards and purchased options, when using derivatives in their hedging strategies, due to the impact of the accounting standard.
IAS 39 was introduced on January 1st, 2005, and it mandates that all derivatives be recognised on the balance sheet and measured at fair value, which means that all gains and losses from financial instruments must be recorded even if they are not realised. This can lead to huge volatilities, even amongst vanilla call options.

According to Ciaran Kane, head of treasury with Barclays Capital, ‘Companies will, at least initially, have a natural bias to use derivatives for which they can more easily get hedge accounting. This does not necessarily mean that the hedging volume has decreased, rather the instrument used to hedge may have changed’.

However, he adds that some early-adopters of IAS 39, who initially used more vanilla type products, have recently exhibited a renewed interest in using more exotic structures again. Also, although Irish, and UK companies, are focusing on more vanilla products, their counterparts in France and Belgium, seem, on a relative basis, to be more interested in exploring ways in which they can continue to use the same type of (exotic) hedging instruments as they currently do, says Kane.

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