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hedge effectiveness testing

Hedge effectiveness testing is the set of procedures that firms implementing Hedge Accounting under IFRS 9 are allowed to implement to test the effectiveness of their hedges.The two most commonly used methods of hedge effectiveness testing are the ‘Dollar offset method’ and the ‘Critical match method’.

The dollar offset method is a quantitative method that involves comparing the variation in the fair value, present value or cash flow expectation of a hedged item, with the variation in the fair value, present value or cash flow expectation of the hedging instrument.

The critical terms match method involves comparing the key terms of the hedging instrument and the hedged item, providing that both elements meet a set of specific criteria.