Fair Value of Hedge
The entire change in the fair value of the derivative would be recognized in current earnings in the period of change along with the change in fair value of the hedged item attributable to the risk being hedged. The only risks that may be hedged are risk of changes in fair value due to–
* changes in market price of an item,
* changes in market interest rates,
* changes in foreign currency exchange rates, or
* credit (default) risk.
An interest rate swap could be entered into to hedge the fair value of a recognized liability. The fair value of fixed-rate debt will vary with changes in the market rate. Entering into a swap to receive fixed and pay variable interest would result in future cash flows varying with the market rate, and therefore hedge against changes in fair value due to market rate changes.