A fair value hedge differs from a cash flow hedge because a fair value hedge
A)cannot be used for firm purchase or sales commitments.
B)is not recorded unless it is a highly-effective hedge.
C)records gains or losses in the value of the derivative directly to earnings of the company.
D)defers the gains or losses in the value of the derivative using Other Comprehensive Income.

Question

Quizplus · Accepted Answer

A fair value hedge records gains or losses in the value of the derivative directly to earnings of the company, whereas a cash flow hedge defers the gains or losses using Other Comprehensive Income. Therefore, option C is the correct answer. Option A is incorrect because a fair value hedge can be used for firm purchase or sales commitments. Option B is incorrect because both fair value and cash flow hedges must be recorded if they meet specific accounting requirements. Option D is incorrect because it describes the accounting treatment for a cash flow hedge, not a fair value hedge.

A Fair Value Hedge Differs from a Cash Flow Hedge