What is cash flow hedge and fair value hedge?
Similarly, it is asked, how is cash flow hedge different from fair value hedge?
For example, even when you have a fixed item, you can still hedge it under cash flow hedge and protect it against foreign currency risk. Equally, you can hedge a variable rate debt against fair value changes – and that's the fair value hedge.
Furthermore, what is a cash flow hedge example? A cash flow hedge is designed to minimize the risk that a company will have to pay more than it expects. The gasoline example in the previous section is an example of a cash flow hedge.
Considering this, what is cash flow hedge accounting?
A cash flow hedge is a hedge of the exposure to variability in the cash flows of a specific asset or liability, or of a forecasted transaction, that is attributable to a particular risk. The accounting for a cash flow hedge is as follows: Hedging item.
What is the objective of a fair value hedge?
Fair value hedges are hedges that reduce the risk of loss from declines in an asset's value. A fair value hedge is paired with the underlying asset it is protecting. When the value of the underlying asset falls, the value of the hedge goes up and reduces the loss in value to the asset owner.