Hedge effectiveness

The degree to which changes in the fair value or cash flows of a hedged item that are attributable to the hedged risk are offset by changes in the fair value or cash flows of the related hedging instrument.

In a situation where a hedge is ineffective (or inefficient) the ineffectiveness may arise from:

1. Basis risk or basis differences; or
2. Differences between the quantum of (i) the hedged item and (ii) the hedging instrument.

Also known as Hedge efficiency.

See also

• Basis risk
• Efficiency
• Hedge
• Hedge accounting
• IAS 39