The degree to which changes in the fair value or cash flows of a hedge item that are attributable to a hedge risk are offset by the changes in the fair value or cash flows of a hedging instrument, describes:
A) transaction exposure;
B) hedge ineffectiveness;
C) hedge effectiveness;
D) transaction variability.

Question

Quizplus · Accepted Answer

The description provided in the question is referring to hedge effectiveness, which is the degree of offset between changes in the fair value or cash flows of the hedge item and the hedging instrument. Option A is incorrect as transaction exposure relates to the risk of fluctuations in cash flows or fair value because of changes in exchange rates. Option B refers to the extent to which the gains or losses of the hedging instrument fail to offset the losses or gains of the hedged item. Option D is incorrect as transaction variability refers to the fluctuations in the amounts of individual transactions.

The Degree to Which Changes in the Fair Value or Cash