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hedge relationship

The hedge relationship is an accounting term that describes the accordance between all the key components of FX hedging, including: the firm’s objectives and strategies, the nature of the hedge, the hedging instrument, the hedged item, how the hedge ratio is determined and the analysis of possible sources of ineffectiveness.

When applying Hedge accounting, the firm must provide documentation regarding all the elements of the hedge relationship. This documentation needs to be updated if the hedge ratio is rebalanced, when sources of expected ineffectiveness change and for changes to the effectiveness methods used.