%0 Journal Article %A Jeffrey Wallace %T Option Hedging Strategies Under FAS 133 %D 2001 %J Special Issues %P 72-76 %V 2001 %N 1 %X Derivatives Implementation Group (DIG) Implementation Issue G20, Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge, eliminates FAS 133's bias against option hedging. Prior to G20, changes in the time value of option hedges were reported in earnings. The result was not only unpredictable earnings volatility but also additional reporting complexity and confusion. With G20, the true economic gain or loss from the option, net of the premium, is recognized in earnings only at the maturity of the underlying forecasted exposure. This article explores the advantages of options vs. forward contracts; how to apply G20 to cash flow option hedges, including techniques for managing imperfect option P&L ineffectiveness; situations where using the time value exclusion may be better than applying G20; and how corporate foreign exchange benchmarking data supports the conclusion that an active option hedging strategy is not only a mainstream FX hedging practice, but also is more conservative and economically superior than a “buy and hold” option hedging strategy. %U https://guides.pm-research.com/content/iijspecial/2001/1/72.full.pdf