Risk Management

Hedge Effectiveness Analysis Toolkit

HEAT^TM, Hedge Effectiveness Analysis Toolkit, is a risk management solution published by J.P. Morgan. It provides a toolkit to help corporations navigate the complexities of hedge effectiveness testing and balance the economic and accounting perspectives of hedging decisions.

The HEAT^TM Technical Document sets out and explains a consistent and structured framework for evaluating hedge effectiveness. With particular reference to IAS39 and FAS133, the document aims to educate, raise awareness and facilitate discussion between corporations, banks and auditors. It contains sections which

Explain the intuition behind hedge effectiveness
Explore the principles of hedge effectiveness under IAS39 and FAS133
Examine the practical issues surrounding hedge effectiveness testing
Describe alternative methodologies for hedge effectiveness testing and guide the choice of an appropriate methodology for each hedging situation
Set out the HEAT^TM framework for hedge effectiveness analysis

Although the new accounting standards were the main motivation behind HEAT^TM, the framework is based on very general principles and can be applied in any hedging situation. It is important to note that HEAT^TM is not a set of rules for guaranteeing hedge accounting treatment, nor is it the final word on hedge effectiveness. It is a framework of methodologies that will grow and evolve with changes in accounting standards and with changes in the risk management needs of corporations.

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