Fair value hedge

Fair value hedge:

‘A fair value hedge seeks to offset the risks of changes in the fair value of an existing asset or liability or an unrecognised firm commitment that may give rise to a gain or loss being recognised in the statement of profit and loss. An example of a fair value hedge is the hedge of a fixed rate bond with an interest rate swap, changing the interest rate from fixed to floating.’ In such case, an entity is hedging its exposure to adverse changes in fair value of the bond due to a fall in the market interest rate. Another example is the hedge of the changes in value of inventory using commodity futures contracts.

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