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Chapter 4
Hedging instrument
A hedging instrument (IFRS 9) 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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