In which of the following activities is hedge accounting prohibited?
A)hedging an overall portfolio as opposed to an individual transaction
B)using short calls to protect a long asset
C)using long puts to protect an asset
D)hedging a long position with a short futures
E)hedging a swapt with a swaption

Question

Quizplus · Accepted Answer

Hedge accounting is prohibited when hedging an overall portfolio as opposed to an individual transaction as it does not meet the criteria for effectiveness testing. The other activities listed are all acceptable methods of hedging that can qualify for hedge accounting under certain circumstances. Using short calls to protect a long asset creates a covered call strategy, using long puts to protect an asset creates a protective put strategy, hedging a long position with a short futures creates a futures hedge, and hedging a swap with a swaption creates a swaption hedge.

In Which of the Following Activities Is Hedge Accounting Prohibited