What If You Don’t Use Hedge Accounting When Hedging Financial Risk With Derivatives?
Minneapolis, MN | December 6, 2023 | By: John Trefethen, Director and Co-Founder
This week’s HedgeStar’s top five list is the top five things that can go wrong if you don’t use hedge accounting when hedging financial risk with derivatives.
Number 5: A higher cost of capital. Increased earnings volatility and a lack of transparency in risk management practices can impact the company’s perceived risk profile which can lead to a higher cost of capital from lenders.
Number 4. Impact on investor confidence. Investors tend to prefer companies that demonstrate stability and predictability in their financial results.
Number 3. Reduced transparency. Hedge accounting allows companies to link the financial impact of hedging instruments to the items being hedged, providing greater transparency in financial reporting.
Number 2. Inconsistent financial reporting. Hedge accounting provides a systematic and consistent approach to recognizing gains and losses from hedging activities.
Number 1. Increased earnings volatility. Without hedge accounting, changes in the fair value of hedging instruments are immediately recognized in the income statement leading to increased earnings volatility.
Learn more today and contact a HedgeStar expert!
Be on the lookout for our next top 5 list – The top five problems companies run into when they don’t hedge their exposures to foreign currencies.
Author: John Trefethen, Director and Co-Founder
Mobile: 612-868-6013
Office: 952-746-6040
Email: jtrefethen@hedgestar.com
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Email: mroth@hedgestar.com
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