FAIR VALUE HEDGE

fair value hedge: translation

A type of hedge defined by FAS 133. An entity may designate a derivative instrument as hedging the exposure to changes in the fair value of an asset or a liability, or a portion of an asset or a liability. Certain requirements must be met to qualify for fair value hedge accounting. Changes in the fair market value of the derivative instrument in qualifying fair value hedges are recorded and reported in earnings. At the same time, gains or losses associated with the hedged risk are also recognized in current earnings. The carrying value ( book value) of hedged asset/liability must be adjusted commensurately with resulting basis adjustment, producing a prospective yield adjustment thus offsetting the related derivative loss/gain in the same accounting period.

See FAS 133. American Banker Glossary