Chapter 4 - Hedging

Question 1

Hedge

Answer 1

Transaction to reduce business risk

Question 2

IAS 39 - Hedging

Answer 2

• Transaction designated as hedge with full documentation
  
  • Hedged item
  • Hedging instrument
  • Nature of risk
  • How will assess effectiveness
• Expected to be highly effective (80% –> 125%)
• Hedge effectiveness reliably measurable

Question 3

3 Types of Hedge

Answer 3

• Fair Value
  
  • Already owned (or owe)
  • Recognise immediately in P+L
• Cash Flow
  
  • Don’t own yet
  • OCI, transfer to P+L when cash flow recognised
• Net investment in foreign operation
  
  • OCI, transfer to P+L when dispose foreign operation

Question 4

Disclosures - Financial Instruments (IFRS 7)

Answer 4

• Credit - party fails to meet obligations
• Liquidity - failing to meet obligations e.g. interest
• Market - changes in market prices