Derivative Instruments Acquired to Hedge Exposure May Be Classified as Either

question 8

Essay

Derivative instruments acquired to hedge exposure may be classified as either a fair value hedge or a cash flow hedge.Distinguish between the two types of hedges.

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Definitions:

Inventory

The raw materials, work-in-process products, and finished goods considered part of a business's assets that are ready or will be ready for sale.

Cash Coverage Ratio

The Cash Coverage Ratio measures a company's ability to cover its debt obligations with its operating cash flow, thus indicating its financial health and liquidity.

Depreciation Expense

The allocated amount of an asset's cost expensed over its useful life to represent wear and tear, obsolescence, or age.

EBIT

Earnings Before Interest and Taxes captures a business's earning power by including all costs except those related to interest and taxes.