Cash flow hedge

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A cash flow hedge is a hedge of the exposure to the variability of cash flow that

Hedge (finance)

A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.

Cash flow movement of money into or out of a business, project, or financial product

A cash flow is a real or virtual movement of money:

  1. is attributable to a particular risk associated with a recognized asset or liability. Such as all or some future interest payments on variable rate debt or a highly probable forecast transaction and
  2. could affect profit or loss (IAS 39, §86b)

This is mostly an accountant's definition.


See also

Hedge accounting

Hedge accounting is an accountancy practice, the aim of which is to provide an offset to the mark-to-market movement of the derivative in the profit and loss account. There are two types of hedge recognized. For a fair value hedge the offset is achieved either by marking-to-market an asset or a liability which offsets the P&L movement of the derivative. For a cash flow hedge some of the derivative volatility into a separate component of the entity's equity called the cash flow hedge reserve. Where a hedge relationship is effective, most of the mark-to-market derivative volatility will be offset in the profit and loss account. Hedge accounting entails much compliance - involving documenting the hedge relationship and both prospectively and retrospectively proving that the hedge relationship is effective.

Accumulated other comprehensive income

Note: Reference cited below, FAS130, remains the most current accounting literature in the United States on this topic.

Statement of changes in equity

A Statement of changes in equity and similarly the statement of changes in owner's equity for a sole trader, statement of changes in partners' equity for a partnership, statement of changes in Shareholders' equity for a Company or statement of changes in Taxpayers' equity for Government financial statements is one of the four basic financial statements.

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In finance, the net present value (NPV) or net present worth (NPW) is the summation of the present (now) value of a series of present and future cash flows. Because NPV accounts for the time value of money NPV provides a method for evaluating and comparing products with cash flows spread over many years, as in loans, investments, payouts from insurance contracts plus many other applications.

In general, to invest is to distribute money in the expectation of some benefit in the future. For example, investment in durable goods, in real estate by the service industry, in factories for manufacturing, in product development, and in research and development. However, this article focuses specifically on investment in financial assets.

In finance, an equity derivative is a class of derivatives whose value is at least partly derived from one or more underlying equity securities. Options and futures are by far the most common equity derivatives, however there are many other types of equity derivatives that are actively traded.

Swap (finance) financial derivative product

A swap is a derivative in which two counterparties exchange cash flows of one party's financial instrument for those of the other party's financial instrument. The benefits in question depend on the type of financial instruments involved. For example, in the case of a swap involving two bonds, the benefits in question can be the periodic interest (coupon) payments associated with such bonds. Specifically, two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap. The swap agreement defines the dates when the cash flows are to be paid and the way they are accrued and calculated. Usually at the time when the contract is initiated, at least one of these series of cash flows is determined by an uncertain variable such as a floating interest rate, foreign exchange rate, equity price, or commodity price.

Cashflow matching is a process of hedging in which a company or other entity matches its cash outflows with its cash inflows.

In finance, a foreign exchange option is a derivative financial instrument that gives the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. See Foreign exchange derivative.

In finance, interest rate immunization, as developed by Frank Redington is a strategy that ensures that a change in interest rates will not affect the value of a portfolio. Similarly, immunization can be used to ensure that the value of a pension fund's or a firm's assets will increase or decrease in exactly the opposite amount of their liabilities, thus leaving the value of the pension fund's surplus or firm's equity unchanged, regardless of changes in the interest rate.

Prime brokerage is the generic name for a bundled package of services offered by investment banks, wealth management firms, and securities dealers to hedge funds which need the ability to borrow securities and cash in order to be able to invest on a netted basis and achieve an absolute return. The prime broker provides a centralized securities clearing facility for the hedge fund so the hedge fund's collateral requirements are netted across all deals handled by the prime broker. These two features are advantageous to their clients.

An energy derivative is a derivative contract based on an underlying energy asset, such as natural gas, crude oil, or electricity. Energy derivatives are exotic derivatives and include exchange-traded contracts such as futures and options, and over-the-counter derivatives such as forwards, swaps and options. Major players in the energy derivative markets include major trading houses, oil companies, utilities, and financial institutions.

Foreign exchange risk is a financial risk that exists when a financial transaction is denominated in a currency other than that of the base currency of the company. The exchange risk arises when there is a risk of appreciation of the base currency in relation to the denominated currency or depreciation of the denominated currency in relation to the base currency. The risk is that there may be an adverse movement in the exchange rate of the denomination currency in relation to the base currency before the date when the transaction is completed.

In mathematical finance, a replicating portfolio for a given asset or series of cash flows is a portfolio of assets with the same properties. This is meant in two distinct senses: static replication, where the portfolio has the same cash flows as the reference asset, and dynamic replication, where the portfolio does not have the same cash flows, but has the same "Greeks" as the reference asset, meaning that for small changes to underlying market parameters, the price of the asset and the price of the portfolio change in the same way. Dynamic replication requires continual adjustment, as the asset and portfolio are only assumed to behave similarly at a single point.

Private equity firm investment manager that makes investments in the private equity of operating companies

A private equity firm is an investment management company that provides financial backing and makes investments in the private equity of startup or operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital. Often described as a financial sponsor, each firm will raise funds that will be invested in accordance with one or more specific investment strategies.

Financial management focuses on ratios, equity and debt. It is useful for portfolio management,distribution of dividend,capital raising,hedging and looking after fluctuations in foreign currency and product cycles.Financial managers are the people who will do research and based on the research, decide what sort of capital to obtain in order to fund the company's assets as well as maximizing the value of the firm for all the stakeholders. It also refers to the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization. It is the specialized function directly associated with the top management. The significance of this function is not seen in the 'Line' but also in the capacity of the 'Staff' in overall of a company. It has been defined differently by different experts in the field.

A foreign exchange hedge is a method used by companies to eliminate or "hedge" their foreign exchange risk resulting from transactions in foreign currencies. This is done using either the cash flow hedge or the fair value method. The accounting rules for this are addressed by both the International Financial Reporting Standards (IFRS) and by the US Generally Accepted Accounting Principles as well as other national accounting standards.

A dual-currency note (DC) pays coupons in the investor's domestic currency with the notional in the issuer’s domestic currency. A reverse dual-currency note (RDC) is a note which pays a foreign interest rate in the investor's domestic currency. A power reverse dual-currency note (PRDC) is a structured product where an investor is seeking a better return and a borrower a lower rate by taking advantage of the interest rate differential between two economies. The power component of the name denotes higher initial coupons and the fact that coupons rise as the foreign exchange rate depreciates. The power feature comes with a higher risk for the investor, which characterizes the product as leveraged carry trade. Cash flows may have a digital cap feature where the rate gets locked once it reaches a certain threshold. Other add-on features include barriers such as knockouts and cancel provision for the issuer. PRDCs are part of the wider Structured Notes Market.

Corporate finance area of finance dealing with the sources of funding and the capital structure of corporations

Corporate finance is an area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value. Although it is in principle different from managerial finance which studies the financial management of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.

IFRS 9

IFRS 9 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB). It addresses the accounting for financial instruments. It contains three main topics: classification and measurement of financial instruments, impairment of financial assets and hedge accounting. It will replace the earlier IFRS for financial instruments, IAS 39, when it becomes effective in 2018. However, early adoption is allowed.

Companies that do business in more than one currency are exposed to exchange rate risk – that is, changes in the value of one currency versus another. Exchange rate risk is especially high in periods of high currency volatility.