HEAT™ (HEDGE EFFECTIVENESS ANALYSIS TOOLKIT): A CONSISTENT FRAMEWORK FOR ASSESSING HEDGE EFFECTIVENESS UNDER IAS 39 AND FAS 133 FROM JPMORGAN

Abstract

HEAT™ or Hedge Effectiveness Analysis Toolkit is JPMorgan's latest addition to a long list of innovative and cutting-edge risk management solutions. HEAT is destined to help corporations navigate the complexities of hedge effectiveness testing under IAS 39 and FAS 133. HEAT comprises a consistent framework incorporating alternative methodologies for understanding and implementing hedge effectiveness testing. It is unique because it enables corporations to assess the effectiveness of hedges in both economic and accounting terms and also enables corporations to estimate the potential impact on earnings if hedge accounting is not obtained. While HEAT provides corporations with a consistent framework incorporating many alternative methodologies for hedge effectiveness testing, auditors will ultimately determine the appropriateness of any given methodology from a regulatory and accounting perspective, and as such accounting advice should be sought before implementing a particular methodology. In practice, even relatively simple hedge effectiveness methodologies can give surprising and sometimes counterintuitive results. HEAT helps to address the pitfalls that need to be negotiated in developing a consistent and intuitive approach to evaluating hedge effectiveness.