Hedging

Question 1

Hedging

Answer 1

An entity enters into in order to protect themselves from risk (e.g currency risk)

Question 2

Hedging instrument

Answer 2

defined as a financial asset or liability whose fair value or cash flow is expected to offset changes in the fair value of cash flows of a designated hedge item

Question 3

Needs to meet 5 conditions

Answer 3

1. must be formal designation and documentation of the hedge at inceptin
2. hedge must be expected to be higighly effective (80-125%)
3. for cash flow hedges the transaction by be highly probable
4. effectiveness of the hedge must be able to be reliably measured
5. hedge must be assessed on an ongoing basis of effectiveness

Question 4

Fair Value Hedge

Answer 4

• if hedging used the physical asset/liability is recorded as per normal
• hedging instrument is recorded at its fair value when the instrument is acquired

Question 5

Cash Flow Hedge

Answer 5

1. on signing a forward contract
2. prior to the delivery of the physical asset
3. on delivery
4. on maturity