5.02- Fair Value vs. Cash Flow Hedge

Question 1

What are the two types of hedges under GAAP?

Answer 1

• Fair Value Hedge

- Cash Flow Hedge

Question 2

If a Fair Value derivative is hedging against a recognized asset or liability on the BS then changes in the value of the derivative will be reported where?

Answer 2

Income from continuing operations

Question 3

What is an example of a fair value hedge?

Answer 3

The purchase of put options to protect against a possible decline in the market price of a stock portfolio, if the market declines the losses in the stock will be offset by gains on the puts

Question 4

Where can FV hedges be used? 4 examples

Answer 4

• hedge against the value of inventories
• the value of a fixed-income investment
• the value of a fixed-rate debt obligation
• a firm commitment