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Designated for special accounting treatment
The accounting standards allow either a fair value hedge or a cash flow hedge to be used to hedge
recorded foreign currency assets and liabilities. The flexibility for the hedge designations allows
flexibility for a company to manage its foreign-denominated debt (for example, converting a variable
rate foreign debt into variable rate functional currency debt or converting a variable rate foreign debt
into fixed rate functional debt). Under the definition of a cash flow hedge, the hedge locks in the future
cash flow amounts. Therefore, the cash flow hedge of a foreign variable rate debt would need to hedge
not only the forex exposure but also convert the variable interest rate to a fixed interest rate. However,
a fair value hedge of a foreign variable rate debt would need to hedge only the forex exposure and
maintain the exposure to variable interest rates.
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