Hedge Accounting

AAA

DEFINITION of 'Hedge Accounting'

A method of accounting where entries for the ownership of a security and the opposing hedge are treated as one. Hedge accounting attempts to reduce the volatility created by the repeated adjustment of a financial instrument's value, known as marking to market. This reduced volatility is done by combining the instrument and the hedge as one entry, which offsets the opposing movements.

INVESTOPEDIA EXPLAINS 'Hedge Accounting'

The point of hedging a position is to reduce the volatility of the overall portfolio. Hedge accounting has the same effect except that it's used on financial statements. For example, when accounting for complex financial instruments, such as derivatives, the value is adjusted by marking to market; this creates large swings in the profit and loss account. Hedge accounting treats the reciprocal hedge and the derivative as one entry so that the large swings are balanced out.

RELATED TERMS
  1. De-hedge

    The process of closing out positions that were originally put ...
  2. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  3. General Ledger

    A company's main accounting records. A general ledger is a complete ...
  4. Finance

    The science that describes the management, creation and study ...
  5. Mark To Market - MTM

    1. A measure of the fair value of accounts that can change over ...
  6. Pairs Trade

    The strategy of matching a long position with a short position ...
Related Articles
  1. Bonds & Fixed Income

    Credit Default Swaps: An Introduction

    This derivative can help manage portfolio risk, but it isn't a simple vehicle.
  2. Mutual Funds & ETFs

    Hedge Fund Due Diligence

    Analyzing a hedge fund will help you determine whether it's a good investment and a good fit.
  3. Options & Futures

    7 Hedge Fund Manager Startup Tips

    Starting a hedge fund is the new American dream. Find out how you can pull it off.
  4. Mutual Funds & ETFs

    Taking A Look Behind Hedge Funds

    Hedge funds can draw returns well above the market average even in a weak economy. Learn about the risks.
  5. Options & Futures

    A Beginner's Guide To Hedging

    Learn how investors use strategies to reduce the impact of negative events on investments.
  6. Retirement

    How The Big Boys Buy

    Learn what those in-the-know look for when acquiring a company.
  7. Delivery duty paid (DDP) is a shipping term.
    Investing

    What does DDP Mean?

    Delivery duty paid (DDP) is a shipping term specifying that the seller is responsible for all costs associated with delivery of the goods to the buyer. It is usually used when goods are exported ...
  8. Fundamental Analysis

    What is a good interest coverage ratio?

    Learn the importance of the interest coverage ratio, one of the primary debt ratios analysts use to evaluate a company's financial health.
  9. Fundamental Analysis

    What is a bad interest coverage ratio?

    Understand how interest coverage ratio is calculated and what it signifies, and learn what market analysts consider to be an unacceptably low coverage ratio.
  10. Active Trading Fundamentals

    What is liquidity risk?

    Learn how to distinguish between the two broad types of financial liquidity risk: funding liquidity risk and market liquidity risk.

You May Also Like

Hot Definitions
  1. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  2. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  4. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  5. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  6. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
Trading Center