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

  2. Mutual Funds & ETFs

    Hedge Fund Due Diligence

  3. Options & Futures

    7 Hedge Fund Manager Startup Tips

  4. Mutual Funds & ETFs

    Taking A Look Behind Hedge Funds

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
Trading Center