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Hello tutor,
Could you kindly tell me the exact difference between cashflow hedge and for value hedge? I do not get it. Both of them involves cash outflow Nd inflow??
in my point of view, CF hedge is to protect the changes in cashflow due to interest rate, exchange rate etc. As for FV hedge is to protect changes in fair value? but in real, I rarely see FV hedge, hope tutor can explain further what’s the usage of FV hedge and how it works in real.
If my words is incorrect please correct me, thanks
FV hedge is generally of a recognised asset in the SFP – e.g. inventory of gold.
CF hedge is of a FUTURE cash flow – e.g. expected cost of a machine to be purchased in a different currency.
In some circumstances you can use either FV hedge or CF hedge accounting…. BUT
Examiner will keep it VERY simple.
FV hedge = P&L
CF hedge = OCIOne more question please..
In fair value hedge, why do we not differentiate between effective portion and ineffective portion of hedge?
Never thought about it. 🙂
Mercifully ……………….. neither have the standard writers – perhaps no-one is bothered because, in a FV hedge, everything winds up in the P&L.
Texts show as if effective and ineffective portion is for cashflow hedge only and it confuses a lot but as you said since everything goes to the P and L, no difference reported.
Thank you very much
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