CFM27010 | Accounting for corporate finance: hedging: introduction

What is hedging?

Companies will often try and mitigate the risks that could impact upon the company’s core business. The company will often enter into financial instruments which will be structured to minimise these risks.

In particular:

• The hedged item is the asset, liability or future transaction whose risk is being mitigated.

• The hedging instrument is the instrument used to mitigate the risk associated with the hedged item.

• A hedging relationship is where a company has a hedging instrument to mitigate the hedged item.