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Credit derivatives terminology

By Vinod Kothari

 

 

Hedge accounting: (1) Hedge accounting is the fixation of hedge relationship between a hedging item and a hedging instrument, marking both to market on each reporting period, such that if the hedging instrument effectively undoes the volatility in the hedged item, the accounting effect of the value-changes in the hedged item are nullified by those in the hedging instrument, so as to affect the revenue of the enterprise only to the extent of the difference between the two. If the hedge is not effective, hedge accounting is discontinued.

            (2) For tax purposes, hedge treatment would be mean the hedging instrument is integrated with the hedged item, and only the net gains/losses in the two are taxed or allowed as expenses.

 

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