Question

Briefly explain, in your own words, three of the hedge transaction types. Describe in which situations each would be used and why.

Answer 1

Step-by-step explanation:

Transaction types:

1. Fair Value Hedge: the risk being hedged is the change in the fair value of assets and liabilities between the contract date and settlement date. This is used to hedge interest rates, foreign exchange rates etc.

2. Cash Flow Hedge: the risk being hedged is the exposure to variability to cash flows. This is used to hedge equity prices, commodity prices

3. Hedge of net investment in foreign operation: The risk being hedged is currency risk associated with translation of foreign operations.