BNP Paribas has come up with various hedging strategies for corporates wanting to hedge their interest rate exposure without suffering from the volatility swings that the new accounting rules could trigger. Melissa Allen, a structurer in the global risk solutions group in London, said that because International Accounting Standard 39 is rules based, rather than principles based, how the derivatives are structured is critical to whether they will qualify for hedge accounting.
For example, if a corporate entered a swap to hedge interest rate risk, but reduced the cost by selling an embedded knock-out option this would not qualify for hedge accounting and the mark-to-market gains and losses of the position would have to be registered. If the corporate, however, entered a swap and then separately sold options it would be able to claim hedge accounting on the swap even though this has the same economic effect.
Allen said corporates might start to enter participating cap structurers instead of collars for the same reason. In a collar, swings in the value of the trade have to be recognized all the time the spot rate is trading within the collar. In a participating cap structure the swings in value, and therefore the impact on the balance sheet, is much smaller. Both trades can be structured with a zero-premium and limit the corporate's exposure, but in the participating cap structure the corporate will receive some gain from a reduction in rates.
