6.03- Exchange Transactions- Fair Value Hedge

Question 1

What is a hedge in relation to a foreign exchange contract?

Answer 1

when a foreign exchange contract is entered into for the purposes of eliminating or stopping a risk

Question 2

What are the two types of hedges?

Answer 2

fair value hedge and cash flow hedge

Question 3

What is a fair value hedge?

Answer 3

it protects a company against risks associated with changes in fair values

Question 4

How do you account for increases and decreases with a FV hedge?

Answer 4

recognized as a gain or loss on the Income statement with a corresponding gain/loss recognized on the hedged item in the same period