What is the primary difference between a cash flow hedge and a fair value hedge?
A) The fair value hedge must completely offset the variability in the cash flow from the foreign currency receivable or payable.
B) The cash flow hedge can only be used to offset potential foreign currency losses on accounts receivable.
C) The cash flow hedge must completely offset the variability in cash flow from the foreign currency receivable or payable.
D) The fair value hedge can only be used to offset the variability in cash flow from long-term fixed assets related to foreign currency fluctuations.

Question

Quizplus · Accepted Answer

The primary difference between cash flow hedge and fair value hedge is that a cash flow hedge must completely offset the variability in cash flow from the foreign currency receivable or payable, while a fair value hedge can only be used to offset the variability in cash flow from long-term fixed assets related to foreign currency fluctuations. Option A is incorrect as it refers to the requirements of a fair value hedge. Option B is incorrect as it limits the use of cash flow hedge only to accounts receivable. Option D is incorrect as it wrongly describes the requirements for fair value hedge.

What Is the Primary Difference Between a Cash Flow Hedge