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Hello Tutor,
Can you kindly explain what is meant by ‘effective and ineffective portion’?
Thank you.
Assume that:
1. Movement on expected cash flow is 10.
2. Movement on derivative is 15.Then 10 is effective (to OCI) and 5 is ineffective (to P&L).
Right, I understand that.
If movement in hedging instrument is greater than the movement in hedged item than the exess will be recognised in P and L.
But what exactly is meant by “effective portion”. How is it effective, please?
And one more question please,
Is cashflow hedge a binding contract?
In Fair value hedge I have gathered, it is binding, you got to pay and receive the same amount that has been decided in futures contract.
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