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. Pairs Trade

    The strategy of matching a long position with a short position ...
  3. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  4. Finance

    The science that describes the management, creation and study ...
  5. General Ledger

    A company's main accounting records. A general ledger is a complete ...
  6. Mark To Market - MTM

    1. A measure of the fair value of accounts that can change over ...
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. Taxes

    What is the best method of calculating depreciation for tax reporting purposes?

    Learn the best method for calculating depreciation for tax reporting purposes according to generally accepted accounting principles, or GAAP.
  8. Fundamental Analysis

    Are accounts receivable used when calculating a company's debt collateral?

    Learn how accounts receivables are recorded as assets on a balance sheet; they are used when calculating a company's total debt collateral.
  9. Fundamental Analysis

    Work In Progress (WIP)

    Work in progress, also know as WIP, is an asset on the company balance sheet. WIP is the accumulated costs of unfinished goods that are currently in the manufacturing process.
  10. Options & Futures

    What is the difference between arbitrage and hedging?

    Dive into two very important financial concepts: arbitrage and hedging. See how each of these strategies can play a role for savvy investors.

You May Also Like

Hot Definitions
  1. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  2. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  3. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  4. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  5. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  6. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
Trading Center