For example, the classification of fair value hedging and cash flow hedging is given to you in the original paragraph
Fair value hedging refers to the hedging of the exposure to fair value changes in recognized assets or liabilities, unrecognized firm commitments, or components of the above-mentioned items. This change in fair value stems from a specific risk and will affect the profit or loss or other comprehensive income of the business.
Cash flow hedging refers to the hedging of the risk exposure to changes in cash flows. Changes in cash flows arise from specific risks associated with recognized assets or liabilities, anticipated transactions that are highly likely to occur, or components of these items, and will affect the profit or loss of the business.
I know every word, and I don't know what it means when I connect it.
And even if you memorize this definition by rote and write it down word for word, it is useless, and the test does not test you to write the definition silently, but to judge whether an operation is a fair value hedge or a cash flow hedge.
Well, I just want to ask, can you really tell how to distinguish from this definition?
Teaching materials are always like this, using words that you don't understand, saying things that you already understand.
What we need to do is not to follow the textbook, but to jump out of these clouds and foggy words, return to the essence, and return to the basics.
When you don't understand this classification, you can think about what the purpose of hedging is, and the classification is nothing more than a derivation according to different purposes.
As I said in the previous article (Life without a plan is like running naked).The essence of hedging is to lock in risk by planning ahead and locking in in advance.
Different categories hedge different risks.
Profit-seeking is the nature of businessmen, and companies are worried about two kinds of risks
1.The price of what you already have will fall.
2.The price of things that I haven't bought yet will go up.
The fair value hedge is the risk of the value of the existing thing
Cash flow hedging hedges the risk of an increase in the price of something that you don't already own.
This is also easy to understand.
If a thing is in your hands, what makes people anxious is only whether the price of this thing will fall, whether you are a high-level receiver, and whether you can sell it according to expectations in the future, so you must hedge to lock in value.
If you don't have a thing in your hands, or you haven't signed a fixed** agreement to buy it, why worry about its value**?
Just like why should people who haven't bought a house worry about the risk of housing price collapse, they just want to collapse quickly, hurry, it's best to have a ** waist and knee chop, so that they can pick up a leak.
Far from it. What you don't have yet, you have to take out real money ** to buy, it's this price now, but it may not be this price in a year, and you're worried that you'll have to pay more to buy this thing in the future, so you have to hedge to lock in cash flow.
The ass decides the head.
People who hold and don't have assets are concerned about the opposite risk, and fair value hedging and cash flow hedging distinguish between these different risks.
Do you guys understand?