net investment hedge

In Hedge Accounting, net investment hedging refers to the practice of offsetting FX-related changes in the value of net assets of a subsidiary by using a derivatives instrument. For example, a company with EUR as its functional currency has a wholly owned US subsidiary whose functional currency is USD.

At the date of hedge designation, the company can include the carrying value of the subsidiary’s net assets as a hedge item. The other two types of hedges authorised under hedge accounting are fair value hedges and cash flow hedges.