What Is Hedge Accounting?
Let's understand What Is Hedge Accounting? Hedge accounting is a method of accounting in which entries to adjust the fair value of a security and its opposing hedge are treated as one. Hedge accounting attempts to reduce the volatility created by the repeated adjustment to a financial instrument's value, known as fair value accounting or mark to market. This volatility is reduced by combining the instrument and the hedge as one entry, which offsets the opposing's movements. KEY TAKEAWAYS Hedge accounting uses one entry to adjust the fair value of a security and its opposing hedge. The purpose of a hedge is to reduce volatility associated with value fluctuations on an investment that is not directly related to the investment's performance. There are three categories of hedge accounting: fair value hedges, cash flow hedges, and Net investment hedges. Understanding Hedge Accounting A hedge fund is used to lower the risk of overall losses by assuming an offsetting positi