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. Also known as Hedge efficiency.

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.

See also

• Basis risk
• Efficiency
• Hedge accounting
• IAS 39