Thursday, May 29, 2008

'Many problems may arise when applying a technical theory to practical situations'

Achieving perfect hedge effectiveness tough

Thanks to the hullabaloo surrounding derivatives and accounting rules, the phrase ‘successful hedging’ is fast becoming an oxymoron. Losses, even if notional, on account of hedges seem to suggest that it creates more damage than good. Is it really so difficult? An expert and author stands up in defence. “No, having a hedge is not at all difficult. In fact most companies hedge their risk, that is, they take actions to mitigate or offset the risk that arise from their activities. It is often extremely difficult to achieve perfect hedge effectiveness from an accounting perspective,” says Ms Pooja Gupta, author of Financial Instruments Standards: A Guide on IAS 32, IAS 39 and IFRS 7 ( http://www.tatamcgrawhill.com/ ), published recently.

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