Operations Research 2025
Abstract Submission

2180. OR Meets Accounting: An MIP Formulation for the Item-Instrument Matching Decisions in Fair Value Hedging

Invited abstract in session FA-6: Risk Management, stream Financial Management and Accounting.

Friday, 8:45-10:15
Room: H9

Authors (first author is the speaker)

1. Sinan Gürel
Industrial Engineering Department, Middle East Technical University
2. Ahmet Yüksel
Industrial Engineering Department, Middle East Technical University

Abstract

Uncertainties, such as the interest rate and currency fluctuations, can pose risks to the financial assets of companies. The companies can hedge these risks by purchasing contracts that exchange the value of financial assets and swap their risks with the counterparts. Hedge accounting is a method that represents the hedging activities of a company in its financial statements and shows how the company manages its risks. It helps to reveal the core business operations' performance without interference from the macroeconomic conditions. The increased transparency helps investors to make more accurate decisions about the company. In this study, we consider a fair value hedging activity that requires a company, in each accounting period, to recalculate the fair values of both the hedged items and the hedging instruments. Based on these calculations, the company must rematch the items and instruments to maintain a relationship between their notional amounts, maturities, and fair values as required by the accounting standards. If a company holds numerous financial assets, such as a bank's loan portfolio, alongside many hedge instruments, matching these under the complex constraints of accounting standards becomes computationally demanding. This burden may even prevent firms from utilizing hedge accounting. In this study, we first demonstrate that we can formulate the matching decisions between hedge items and instruments as a mixed-integer program. Then, we present the computational performance of the commercial and open-source solvers on the model.

Keywords

Status: accepted

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