Cash flow hedges are hedges of the exposure to the variability of cash flows. These hedges are attributed to a particular risk that is associated with a recognized asset or liability as well as for forecasted transactions.
For cash flow hedges, the effective portion (gain) of the hedge will be recorded in OCI on the balance sheet while the ineffective portion (loss) is recorded to the income statement. The rules for cash flow hedges are different from fair value hedges.
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A fair value hedge is the hedge of an exposure to changes in fair value of an asset, liability, or unrecognized firm commitment. Gains or losses will be recognized immediately in earnings. There is no balance sheet impact for fair value hedges. The treatment for fair value hedges is different from the treatment of a...
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What is an interest rate swap agreement?
Basically, each party would swap their contractual rate with the other party because they believe they can get a lower rate in the long-term. For a swap to occur, one party would need a fixed rate and the other would need a floating rate. In an interest rate swap arrangement, both parties would be subject...
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