FIN.14:4.1 - Decide what protection is for

Start with the consequence supplied by FIN.13. A corporation may want to preserve a minimum cash contribution, prevent a funding failure, reduce uncertainty in a committed purchase price or limit a loss in the value of an interest. State the protected entity, quantity or activity, horizon and tolerated shortfall. A target for reported earnings needs the corresponding accounting interpretation; a target for payment capacity needs the dated cash account.

Explain why changing that exposure is worth its cost. Protecting the capacity to fund valuable operations, avoiding a costly distress response or maintaining a required margin can justify a hedge. Reducing a measured variance alone does not establish additional corporate value. If the corporation can bear the downside on the selected objective, acceptance may be a feasible alternative. If losses would prevent payment, a favorable expected value does not remove that constraint. FIN.1 supplies the objective and actual alternatives; FIN.2 tests payment capacity.

Keep the underlying commercial decision visible. Changing the invoice currency can move exchange risk to a customer but also change the price or demand. Matching a foreign loan to receipts can leave a useful currency offset and an unsuitable repayment horizon. Changing suppliers or physical stocks changes operations as well as financial exposure. Obtain those consequences from the actual commercial or operating plan; do not assume a natural hedge is free merely because it is not a derivative.

A sufficient supplied exposure and an existing authorized protection arrangement can support direct execution or continued use. Reopen the design when the protected outcome, amount, timing, terms or feasible alternatives change. A missed settlement under an otherwise appropriate contract first needs FIN.15’s account of the actual problem; buying another hedge does not by itself resolve that obligation.