Issues on Hedge Effectiveness Testing

Cristina Bunea-Bontas, Mihaela Cosmina Petre and Gica Culiţă

MPRA Paper from University Library of Munich, Germany

Abstract: The starting point for risk management and hedging lies in understanding a corporation’s exposure to different risks. Hedging is vital for corporate risk management, involving reducing the exposure of the company to particular risks. Hedge effectiveness testing permits firms to assess if they match the timing of the gains and losses of hedged items and their hedging derivatives. In principle, a hedge is highly effective if the changes in fair value or cash flow of the hedged item and the hedging derivative offset each other to a significant extent. This article reviews the concepts of accounting and economic hedging, and presents the requirements for testing the hedge effectiveness.

Keywords: hedge accounting; hedging effectiveness; hedging ineffectiveness; highly effective; effectiveness test (search for similar items in EconPapers)
JEL-codes: G11 M41 (search for similar items in EconPapers)
Date: 2009-10-11
New Economics Papers: this item is included in nep-rmg
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