Which of the following is not an example of a fair value hedge?
A) a forward contract to buy US$ hedging a recognised trade payable in US$.
B) a forward contract to sell US$ hedging a recognised loan receivable in US$.
C) a forward contract to sell US$ hedging a recognised trade receivable in US$.
D) a forward contract to buy US$ hedging a highly probable purchase of inventory in US$.

Question

Quizplus · Accepted Answer

A fair value hedge is used to hedge the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment. Options A, B, and C involve hedging recognized assets or liabilities (trade payable, loan receivable, and trade receivable, respectively), which fits the definition of a fair value hedge. Option D, however, involves hedging a highly probable forecast transaction (purchase of inventory), which is more characteristic of a cash flow hedge, not a fair value hedge.

Which of the Following Is Not an Example of a Fair