A hedged item is an asset, liability, commitment, highly probable transaction, or investment in a foreign operation that exposes an entity to changes in fair value or cash flows, and is designated as being hedged.
Q. How do you calculate hedge effectiveness?
Regression Method The prospective measure of hedging effectiveness is based on the adjusted R2 produced by a regression in which the change in the value of the hedged item is the dependent variable and the change in the value of the derivative is the independent variable.
Table of Contents
- Q. How do you calculate hedge effectiveness?
- Q. What are the two required measures of hedge effectiveness?
- Q. What are hedging reserves?
- Q. What is hedge effectiveness?
- Q. What is effective and ineffective hedge?
- Q. What do you need to know about hedge accounting?
- Q. When to remove hedging gain from cash flow?
- Q. When do you need to hedge foreign currency?
- Q. How is hedging instrument reported in net income?
Q. What are the two required measures of hedge effectiveness?
Two prescribed qualitative methods to assess effectiveness include the Critical Terms Match (CTM) method and the Short-Cut (SC) method. Under the CTM method, the critical terms of the derivative hedging instrument must match perfectly with all the critical terms of the hedged item.
Q. What are hedging reserves?
Hedging Reserves means Reserves established by Agent from time to time with respect to Borrowers’ Indebtedness arising under Hedging Agreements, as determined by Agent in good faith.
Q. What is hedge effectiveness?
Hedge effectiveness is defined as the extent to which changes in the fair value or cash flows of the hedging instrument offset changes in the fair value or cash flows of the hedged item.
Q. What is effective and ineffective hedge?
A hedge is considered effective if the changes in the cash flow of the hedged item and the hedging instrument offset each other. Conversely, if the cash flow of the two items do not offset each other, the hedge is considered ineffective.
Q. What do you need to know about hedge accounting?
For hedge accounting to apply, the forecasted transaction must be probable (likely to occur), the hedge must be highly effective in offsetting fluctuations in the cash flow associated with the foreign currency risk, and the hedging relationship must be properly documented.
Q. When to remove hedging gain from cash flow?
When the hedged forecast transaction subsequently results in the recognition of a non-financial asset (Raw material inventory), Entity A shall remove the accumulated hedging gain or loss at that date from the cash flow hedge/cost of hedging reserve and include it directly in the initial cost or other carrying amount of the asset.
Q. When do you need to hedge foreign currency?
Some companies simply require hedges of all foreign currency transactions. Others require the use of a forward contract hedge when the forward rate results in a larger cash inflow or smaller cash outflow than with the spot rate.
Q. How is hedging instrument reported in net income?
2. The company reports the hedging instrument (forward contract or option) at fair value, but because no gain or loss occurs on the forecasted transaction to offset against, the company does not report changes in the fair value of the hedging instrument as gains and losses in net income. Instead, it reports them in other comprehensive income.
