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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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What is a hedge? Describe the differences between a fair value and a cash flow hedge.

To determine

Describe hedge, and explain the difference between a fair value and a cash flow hedge.

Explanation

Hedge: It is a derivative financial instrument, which helps a company in protecting itself against the financial loss by mitigating exposure of a change in the value of underlying liabilities, future cash flows, or assets.

Two types of hedges are as follows:

Fair value hedge: If the company uses any derivative to cover the risk due to fair value changes of asset, liability, or a commitment, the derivative is classified as fair value hedge. This type of hedge focusses to control the risk caused by the change in fixed terms, prices or rates...

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