The degree to which changes in the fair value of a forward contract offset changes in the fair value or cash flows of a hedged item, describes:
A) transaction exposure.
B) hedge ineffectiveness.
C) hedge effectiveness.
D) transaction variability.

Question

Quizplus · Accepted Answer

The degree to which changes in the fair value of a forward contract offset changes in the fair value or cash flows of a hedged item is known as hedge effectiveness. This refers to how well the hedging strategy is working to mitigate risk. If the offset is not effective, then there is hedge ineffectiveness. Transaction exposure refers to the risk that arises from fluctuating exchange rates in international transactions, and transaction variability is not a relevant term in this context.

The Degree to Which Changes in the Fair Value of a Forward