Question

Hedge documentation required for hedge accounting must include information about

Multiple select question.

a. the type of exposure (cash flow or fair value) being hedged.
b. the reason for entering into the hedge.
c. the foreign currency broker from whom the hedging d. instrument was obtained.

Answer 1

Hedge documentation for hedge accounting does not usually include information about the brokerage company from which the hedging instrument was obtained. It must, however, detail the nature of the risk, the hedging instrument, the hedged item, and the effectiveness measurement strategy.

Step-by-step explanation:

When firms engage in hedging activities to protect themselves against movements in exchange rates, adequate documentation is a prerequisite for hedge accounting. To comply with accounting standards, this documentation must explicitly spell out key elements of the hedging strategy. Importantly, details about the financial institution or brokerage company facilitating the hedge are not usually a part of these disclosures. Essential components include the hedging instrument, the hedged item, the nature of the risk being hedged, and how the entity will assess the hedging instrument's effectiveness.

The use of a financial transaction to hedge involves entering into a contract that locks in an exchange rate for future transactions, thereby minimizing the risk of exchange rate fluctuations. Companies will typically engage a foreign currency broker to arrange this contract, and the cost of this service is either a fee or a spread in the exchange rate.