Page 11 - PowerPoint Presentation

HEDGING

Types of Hedges

• Fair value hedge

• The risk being hedged is a change in the fair value of an

asset or a liability.

• For example, changes in fair value may arise through

changes in interest rates (for fixed-rate loans), foreign

exchange rates, equity prices or commodity prices.

• Cash flow hedge

• The risk being hedged is the exposure to variability in cash

flows that is attributable to a particular risk and could

affect the income statement.

• Volatility in future cash flows will result from changes in

interest rates, exchange rates, equity prices or commodity

prices.

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