Hedging

Question 1

What is hedging?

Answer 1

Buy Derivative that moves into the opposite way to your inventory known as hedging item

Question 2

What is the criteria for hedge being effective?

Answer 2

1) When Hedge and hedging moves opposite of each other

2) Credit risk does not dominate value changes

Question 3

When do you discontinue hedging?

Answer 3

When the criteria for Hedging effective is not met

or if you sold your hedged item

Question 4

What is hedging all about?

Answer 4

Matching

Question 5

What are two types of Hedge?

Answer 5

FV and C/F Hedge

Question 6

What is a FV hedge?

Answer 6

When the hedged item is compared to the hedging item and any gains or losses will be taken to I/S straight away

Question 7

What is CF Hedge?

Answer 7

When the hedged item will occur later on ( i.e. future exchange rates) so gains and losses on the hedging item will be taken to OCI. When the hedged item are realised later on, the hedging item gains/losses will be transferred to P/L

Question 8

When to use the hedging rules?

Answer 8

DIE

1) Designated hedging item at the start
2) Identifiable gains/losses
3) Effective