Dynamic reallocation hedge accounting

• US 7,979,342 B2
• Filed: 10/20/2008
• Issued: 07/12/2011
• Est. Priority Date: 11/28/2000
• Status: Expired due to Term

• Current Assignee: Goldman Sachs & Co. LLC (Goldman Sachs Group Incorporated)
• Original Assignee: Goldman Sachs & Company (Goldman Sachs Group Incorporated)
• Inventors: Bridges, Tim, Evans, Mark, Frankel, Oliver
• Primary Examiner(s): Kalinowski, Alexander
• Assistant Examiner(s): Graham, Clement B
• Application Number:
  US12/254,667
• Publication Number:
  US 20090043712A1
• Time in Patent Office: 995 Days
• Field of Search: 705 35- 38
• US Class Current: 705/37
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/02 Banking, e.g. interest calculation or account maintenance credit or loans G06Q40/03
• CPC Class Codes: G06Q 40/03 Credit; Loans; Processing thereof
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

A hedged exposure and an associated hedging instrument can be accounted for to reduce periodic earnings volatility associated with the hedged exposure. The accounting to reduce the earnings volatility includes designating a portion of the value of the financial exposure as being hedged by the hedging instrument. The designated portion is determined based on a price sensitivity of the hedging instrument with respect to changes in market value of an underlying instrument. In each of a number of sequential periods, the portion of the financial exposure is redesignated based on changed price sensitivity of the hedging instrument. Periodic earnings volatility associated with a hedged exposure also can be reduced by dividing (for accounting purposes) the hedging instrument into a first part (also referred to as a designated part) and a second part (also referred to as a residue part). This division is made in a way that ensures that changes in the value of the first part substantially offset changes in value of the financial exposure. The method also includes designating a portion of the first part as a hedge of the financial exposure such that the remainder of the first part offsets the delta of the second part. In each of a plurality of sequential periods, the portion of the first part is redesignated to maintain the relationship between the first part and the second part whereby the remainder of the first part offsets the delta of the second part.

Claims

1. A computer implemented hedge accounting method for reducing periodic earnings volatility associated with a hedging transaction, the method comprising:

processing data and instructions on a computer to account for a financial exposure of an associated hedging instrument by designating a portion of the value of the financial exposure as being hedged by the hedging instrument at a start of a first of a plurality of sequential periods, the designated portion representing a price sensitivity of the financial exposure with respect to changes in market value of the underlying instrument;

in each subsequent period of the plurality of sequential periods, processing data on the computer to compute a dynamic re-designation of the portion of the financial exposure being hedged by the hedging instrument to reduce periodic earnings volatility associated with a hedging transaction;

for each of the plurality of sequential periods, processing data and instructions on the computer system to compute a change in the value of the designated exposure in each one of the periods and a change in value of the hedging instrument during corresponding ones of the periods;

comparing the change in the value of the designated exposure in each one of the periods to the change in value of the hedging instrument during corresponding ones of the periods;

accounting for the change in value of the hedging instrument as other comprehensive income in the instance the change in value of the hedging instrument is less than the change in the value of the designated exposure in each one of the compared periods; and

accounting for the change in value of the hedging instrument in excess of the change in value of the hedging instrument as earnings in the instance the change in value of the hedging instrument is greater than the change in the value of the designated exposure in each of the compared periods.

2. The method of claim 1, wherein the hedging instrument comprises an instrument selected from the group consisting of a put option, a call option, and a derivative.

3. The method of claim 1, wherein:

the financial exposure is associated with changes in market price of the underlying instrument; and

the hedging instrument is an option to exchange a first amount of the underlying instrument at a first price on a maturity date.

4. The method of claim 3, wherein the first amount is substantially equal to a total value of the financial exposure.

5. The method of claim 3, wherein the hedged item is an instrument selected from the group consisting of a currency, a commodity and an interest rate.

6. The method of claim 1 wherein:

the price sensitivity comprises a delta value;

the financial exposure is associated with an anticipated exchange of an amount of a foreign currency at a future date; and

the hedging instrument comprises an option for a future exchange of the amount of the foreign currency.

7. The method of claim 6, wherein the future exchange comprises an exchange selected from the group consisting of a put option and a call option.

8. A computer implemented method of accounting for a hedged exposure, the method comprising:

procuring a hedging instrument to hedge a total exposure value of a financial instrument; and

on a computer system and prior to each of a series of sequential time periods, processing data and program instructions to cause the computer system to;

dynamically calculate a designated portion of the total exposure value based on a current sensitivity of a price of the hedging instrument and the value of the exposure, and

account for the hedging instrument as a hedge on the designated portion of the total exposure value; and

on the computer system and subsequent to an end of each period of the series of sequential time periods, processing data and program instructions to cause the computer system to;

determine a change in the market value of the hedging instrument over a corresponding time period,

determine a change in the market value of the designated exposure over the corresponding time period, and

account for said change in market value of the hedging instrument offsetting said change in market value of the designated exposure as other than earnings, to reduce periodic earnings volatility associated with accounting for a hedging transaction.

9. The method of claim 8 wherein the total exposure value of a financial instrument comprises an anticipated receipt of a value of a currency and the hedging instrument comprises an option for a sale of the value of the currency.

10. A computer implemented hedge accounting method for reducing periodic earnings volatility associated with a hedging transaction, the method comprising:

processing data and instructions on a computer to account for a financial exposure of an associated hedging instrument by designating a portion of the value of the financial exposure as being hedged by the hedging instrument at a start of a first of a plurality of sequential periods, the designated portion representing a price sensitivity of the financial exposure with respect to changes in market value of the underlying instrument;

in each subsequent period of the plurality of sequential periods, processing data on the computer to compute a dynamic re-designation of the portion of the financial exposure being hedged by the hedging instrument to reduce periodic earnings volatility associated with a hedging transaction;

for each of the plurality of sequential periods, processing data and instructions on the computer system to compute a change in the value of the designated exposure in each one of the periods and a change in value of the hedging instrument during corresponding ones of the periods;

comparing the change in the value of the designated exposure in each one of the periods to the change in value of the hedging instrument during corresponding ones of the periods;

accounting for the change in value of the hedging instrument as other comprehensive income in the instance the change in value of the hedging instrument is less than the change in the value of the designated exposure in each one of the compared periods; and

accounting for excess change in value of the hedging instrument as earnings in the instance the change in value of the hedging instrument is greater than the change in the value of the designated exposure in each of the compared periods.

11. The method of claim 10, wherein the hedging instrument is an option to exchange a first amount of the underlying instrument at a first price on a maturity date.

12. The method of claim 11, wherein the first amount is substantially equal to a total value of the financial exposure associated with changes in market price of the underlying instrument.

13. The method of claim 11, wherein the underlying instrument is an instrument selected from a group consisting of a currency, a commodity and an interest rate.

14. The method of claim 11, wherein the financial exposure is associated with an anticipated exchange of an amount of a foreign currency at a future date

15. The method of claim 14, wherein the hedging instrument comprises an option for a future exchange of the amount of the foreign currency.

16. The method of claim 10, wherein the hedging instrument comprises an instrument selected from the group consisting of a put option, a call option, and a derivative.