Hedge effectiveness

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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.


Metrics for hedge effectiveness include R-Squared and Slope.


See also