Controller Library Value Pack
CFO Library Value Pack

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    Accounting Dictionary

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    Hedging


    Definition:
    Hedging is a risk reduction technique whereby an entity uses a derivative or similar instrument to offset future changes in the fair value or cash flows of an asset or liability. A perfect hedge eliminates the risk of a subsequent price movement. A hedged item can be any of the following individually or in a group with similar risk characteristics:

    • Highly probable forecast transaction
    • Net investment in a foreign operation
    • Recognized asset
    • Recognized liability
    • Unrecognized firm commitment

    Hedge effectiveness is the amount of changes in the fair value or cash flows of a hedged item that are offset by changes in the fair value or cash flows of a hedging instrument.

    Hedge accounting involves matching a derivative instrument to a hedged item, and then recognizing gains and losses from both items in the same period.