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Hedge accounting

An accounting treatment that matches the timing of gains and losses on a hedge with the item it is hedging, reducing profit volatility.

Normally a derivative is measured at fair value through profit or loss, which can create swings even when it is offsetting a real risk. Hedge accounting aligns the two so the income statement reflects the economics of the hedge.

It requires formal documentation and effectiveness testing, and it is widely used by treasuries hedging interest rate and currency risk.

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