Hedge Accounting
From Open Risk Manual
Definition
Hedge Accounting denotes a specialized accounting treatment in Financial Statements for firms that use financial instruments such as derivative instruments to mitigate (hedge) volatility (risk) in the profit or loss statement due to variation in market factors
Elements of Hedge Accounting
- A hedged item (e.g. a financial asset or group / portfolio of assets)
- A hedging instrument (e.g. a derivatives contract)
- A hedging relationship (the formal association of the hedged item(s) with the hedging instrument)
Types of Hedge Accounting
- Fair Value Hedges aim to mitigate (neutralize) fair value fluctuations
- Cash Flow Hedges aim to mitigate (neutralize) cash flow mismatches
