Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide

SUMMARY

• In this type of interest rate derivative, the pay leg will be a fixed rate and the receive leg will be based on some benchmark interest rate like LIBOR.
• Being a derivative instrument, an interest rate swap per se qualifies as a hedging instrument. It should be noted that in an interest rate swap, the risk reward is symmetric and can be more or less compared to an equity futures position. An interest rate swap instrument can be used to hedge primarily interest rate risk.
• A derivative may be designated as a hedging instrument only in its entirety or as a proportion, i.e., a percentage of the notional amount. This type of interest rate swap instrument can be used for conversion of a variable rate debt into a fixed rate debt, and cash flow hedge accounting is applicable for this case subject to the fulfillment of all other requirements for hedge accounting.