What is the cleanest way to document and report on the effectiveness of a hedge? (Webinar Attendee Question)

In general there are two sources of ineffectiveness in the hedge relationship: 1) the derivative does not mature on the same date that the hedged transaction is recorded in the financials and 2) the derivative is larger than the exposure. The second risk is addressed by probability assertions so effectiveness testing is really just proving that even if your transaction happens earlier or later than anticipated the hedge will be effective over its life at offsetting the gains and losses on the underlying. At Hedge Trackers our outsourcing and software clients use a regression library that we maintain that proves that the hedge relationship between the derivative and the hedged item is highly effective in spite of the timing mismatches, for relationships that both “include” and “exclude” time value from the hedge relationship. You need to contemplate the differences in forward points and present value effects if you include time value and contemplate only the present value effects if you are assessing effectiveness on a spot to spot basis. The same regression analysis can serve as both a retrospective and prospective assessment. Fortunately the FASB is contemplating eliminating this analysis for the obviously effective relationships, but for now regression is your safest bet.