hedge effectiveness test fair value hedges gentlemen favorable responses regarding use volatility reduction method roger attached copy article case seen however continued quibble create set data points would inputs testing process last week consulting arm big five accounting firm indicated following method proposed us would acceptable believe method overcomes statistical problems arise using interest rate differences overlapping rolling quarters method 1 calculate daily yield curve changes expressed ratios using historical rates recent say two years note overlap results set around 494 vectors ratios approximately 247 trading days per year example first three yield curves historical set look like 19980801 6 5 6 6 6 7 7 2 19980802 6 3 6 3 6 6 6 9 19980803 6 6 6 8 6 9 7 1 change 8 1 98 8 2 98 6 3 6 5 6 3 6 6 6 6 6 7 6 9 7 1 change 8 2 98 8 3 98 6 6 6 3 6 8 6 3 6 9 6 6 7 1 6 9 2 randomly select 62 ratio vectors approx 62 trading days quarter 3 multiply ratio vectors together get single vector ie 62 6 mo ratios multiplied together 62 lyr ratios multiplied togeter etc result represents single quarterly yield curve transformation apply today yield curve resulting yield curve represents one simulated quarterly change interest rates 4 repeat steps 2 3 adequate number yield curves generated say 100 5 proceed testing process would interested comments leslie abreo andrew kalotay associates inc 61 broadway ste 3025 new york ny 10006 phone 212 482 0900 fax 212 482 0529 email leslie abreo kalotay com visit aka website http www kalotay com fasl 33 article pdf