Hedge Accounting

A large custom smelter encounters severe volatility in monthly income statements despite running a comprehensive hedge program. They are unable to understand the cause and worry their program may not be effective. They need experts skilled in the construction of risk programs, from hedge execution through to hedge control and accounting. We are selected to:

• review their program and help them identify the causes of the volatility
• assist staff to understand the issues and implementing a remedy

We analyze their risks and construct a model to reconcile the outcome difference between their standard accounting and one with hedge accounting. Then we assist their staff to develop links between physical and hedge transaction records and provide correlation tests for hedge effectiveness. Finally, with accounting staff, we develop new hedge definitions for accounting policies ensuring that linked records are consistent with them. Hedge accounting is adopted and metal price related volatility in their P&L is reduced.