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A Business Associate Is Concerned About the Potential Effect of Hedging

question 32

Essay

A business associate is concerned about the potential effect of hedging transactions on the company's annual earnings. In particular, she is concerned about the company's numerous cash flow hedges. Briefly explain to your associate when a gain or a loss from a cash flow hedge is reported in earnings.


Definitions:

Production Possibilities Frontier

A curve depicting all maximum output possibilities for two goods, given a set of inputs.

Utility

In economics, it represents a measure of satisfaction or happiness that consumers derive from the consumption of goods and services.

Efficient

The optimal allocation of resources to maximize the production of goods and services without wasting those resources.

Production Possibilities Frontier

A curve that shows the maximum efficient production level of one good for a given level of production for another, assuming fixed resources and technology.

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