A hedged exposure and an associated hedging instrument can be accounted
for to reduce periodic earnings volatility associated with the hedged
exposure. The accounting to reduce the earnings volatility includes
designating a portion of the value of the financial exposure as being
hedged by the hedging instrument. The designated portion is determined
based on a price sensitivity of the hedging instrument with respect to
changes in market value of an underlying instrument. In each of a number
of sequential periods, the portion of the financial exposure is
redesignated based on changed price sensitivity of the hedging
instrument. Periodic earnings volatility associated with a hedged
exposure also can be reduced by dividing (for accounting purposes) the
hedging instrument into a first part (also referred to as a designated
part) and a second part (also referred to as a residue part). This
division is made in a way that ensures that changes in the value of the
first part substantially offset changes in value of the financial
exposure. The method also includes designating a portion of the first
part as a hedge of the financial exposure such that the remainder of the
first part offsets the delta of the second part. In each of a plurality
of sequential periods, the portion of the first part is redesignated to
maintain the relationship between the first part and the second part
whereby the remainder of the first part offsets the delta of the second
part.