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hedge effectiveness ratio

The hedge effectiveness ratio —in a typical cash flow hedge of a forecast transaction— measures the accuracy of a hedge by comparing, at each reporting date, the fair value of the forecasted transaction and the fair value of the hedging item.

For example if, three months after inception, the fair value of the forecast transaction increased by 100 and the fair value of the hedging instrument decreased by 110, hedge ineffectiveness was the fair value change of the forward was 10 because the fair value change of the forward was higher (by 10) than the fair value change of the forecast sale.