Dear expert,
We upload the exposure from the loan interest rate instrument into the hedge plan.
The exposures (financial liability) consists of interest (cash flow) and final repayment (position).
It's hedged against CCS contract with flow type 1200 & 1120 at end term.
When perform prospective effectiveness test (THM80 and hedge strategy 300 clean price) on the first month end, the detail log shows the calculation as below:
1) hedging instrument -> value at end relationship (which is 0) - NPV of outgoing and incoming - accrual
2) hedge item -> value at end relationship (which is 0) - NPV of only outgoing (exposure) - accrual
So the ratio will not be effective since the value change of hedging instrument contain the difference between positive (incoming) flow and negative (outgoing) flow but the value change (denominator) is only the value of negative flow.
How can we handle this case?
Hedge strategy should be something else to make this effective?
Please advise.
Thank you.
PNS