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Chapter 4

Hedging instrument

A hedging instrument (IAS 39) is an instrument whose fair value or cash flows are
expected to offset changes in the fair value or cash flows of a designated hedged
item. A derivative is often used as a hedging instrument.

Derivative

A financial instrument with all three of the following characteristics:

1 its value changes in response to the change in a specified rate or index (the
‘underlying asset’)

2 it requires little or no initial investment

3 it is settled at a future date.

e.g. futures contracts, options, forward contracts, and interest rate and currency
swaps.

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