Page 27 - PowerPoint Presentation

HEDGING

Example 2 - FIXED INTEREST RATE SWAP

COMMENT

• IFRS 9.6.5.2 (b) states that a cash flow hedge is a hedge of
the exposure to variability in cash flows.

• As the loan was obtained at a fixed interest rate of 12%, the

fixed rate loan does not give rise to any fluctuations in cash
flows since the interest payments are fixed at 12%.

• As a result, Protea Ltd cannot designate the swap as a cash

flow hedge of future interest payments. The hedged risk is
the risk that the fair value of the loan will increase as

market interest rates start to decrease.

• Protea Ltd therefore designates the interest rate swap as a

fair value hedge of the loan even though the loan is not

accounted for at fair value when applying normal
accounting principles (the loan is accounted for at
amortised cost).

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