An exploration and production company will produce and deliver natural gas in North Dakota, delivering into a pipeline in Wyoming.  The company seeks to hedge its exposure to potential changes in the natural gas price it will receive.  a)  What type of basis risk does the company face? b) How might the company construct such a hedge

A fair value hedge differs from a cash flow hedge because a fair value hedge Select one: a.records gains or losses in the value of the derivative directly to earnings of the company. b.defers the gains or losses in the value of the derivative using Other Comprehensive Income. c.cannot be used for firm purchase or sales commitments. d.is not recorded unless it is a highly-effective hedge.

How are derivatives valued on the balance sheet? How is the adjustment to fair value recorded differently for a cash flow hedge versus a fair value hedge? That is, how does the fair value adjustment of each type of hedge affect current period net income and the accounting equation? What are the three criteria that must be met for a derivative to be classified as a hedge?   Once entities decide to buy or sell derivatives to hedge economic risks, they then need to decide whether they want to use hedge accounting; it is an election, not a requirement, even when the derivatives are for the economic purpose of hedging. This election is reminiscent of inventory accounting. Just like when a company selects an inventory method, a company is not required to select the accounting method (LIFO, FIFO, weighted average, specific unit) that most closely corresponds with the physical movement of inventory, although they are free to do so. If entities decide to elect hedge accounting, the following…

Hedgers should buy calls if they are hedging an expected outflow of foreign currency.   True or False ? Explain.