Question

Explain how the accounting for a fair value hedge differs for the hedged item and for the hedging item compared to the accounting for a cash flow hedg

Answer 1

A cash flow hedge is accounted for differently than a fair value hedge.

What is a Fair Value Hedge?

Fair price hedges may be used to mitigate the danger of modifications withinside the truthful marketplace price of liabilities, belongings, or different company commitments. Generally, truthful price hedges pass withinside the contrary route of the hedged object so they may be used to cancel out your losses. As a result, derivatives like alternatives and futures are fantastic examples of truthful price hedges.

What is a Cash Flow Hedge?

Cash go with the drift hedges can assist to mitigate the dangers which are related to surprising modifications in coins flows of belongings or liabilities, instead of the asset or legal responsibility itself. There are many various factors that could result in those kinds of modifications, inclusive of increases/decreases in forex rates, modifications in hobby rates, modifications in asset prices, and so on.

What’s the distinction among Cash Flow Hedge and Fair Value Hedge?

As you could see, the important thing distinction among a coins go with the drift hedge and a truthful price hedge is the hedged object. With a coins go with the drift hedge, you’re hedging the modifications in coins influx and outflow from belongings and liabilities, while truthful price hedges assist to mitigate your publicity to modifications withinside the price of belongings or liabilities. So, at the same time as truthful price hedges are first-rate acceptable to constant price items, the blessings of coins go with the drift hedges lead them to perfect for variable price items.

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