The Theoretical Framework

Determine total historical time horizon

Divide time horizon in hedging
relationships imulation periods

For each simulation period

Determine accounting dates within
simulation period
Obtain historical market rates for each
accounting date
Recalculate terms of hedged item and
hedging instrument at the simulation
periods first accounting date

For each accounting date

Obtain fair value of hedged item and
hedging instrument
Calculate X variable (change in fair value
of hedged item) and Y variable (change
in fair value of hedging instrument)

Next accounting date

Next simulation period

Figure 1.10 Process to Obtain X,Y Observations.

Change in Fair
Value of
Hedged Item

100.000
x
xx
x

50.000
100.000

x
x

x
x

xx

x
xx
50.000 x x
x x
xx
50.000 100.000
xx x
x
x
x
x
50.000
x
x
xx
x
100.000

Figure 1.11 Regression Best Fitting Line.

Change in Fair Value

of Derivative
(inverted scale)

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