The bank holds an MSR asset aggregating 1,000 where fair value and book value at the beginning of the period are equal. The bank hedges this asset with derivative instruments.
During the period, the MSR asset declines in value while the derivatives gain in value. At the end of the period, the bank closes all derivative instruments hedging the MSR.
All illustrations are hypothetical and do not consider other hedge accounting requirements such as proof of effectiveness, adequate documentation, etc.
MSR book value: MSR fair value: MSR "hedged risk": Derivative fair value:
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