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A cash flow hedge [1] is a hedge of the exposure to the variability of cash flow that: is attributable to a particular risk associated with a recognized asset or liability. Such as all or some future interest payments on variable rate debt or a highly probable forecast transaction and; could affect profit or loss (IAS 39, §86b)
Individual bonds provide the ability to match the cash flows needed, which is why the term "cash flow matching" is sometimes used to describe this strategy. Because the bonds are dedicated to providing the cash flows, the term "dedicated portfolio" or “asset dedication” is sometimes used to describe the strategy.
Asset-backed securities are bonds or notes based on pools of assets or collateralized by the cash flows from a specific pool of underlying assets. Mortgage-backed securities are asset-backed securities, the cash flows from which are backed by the principal and interest payments of a set of mortgage loans.
A hedge fund offers people the chance to invest in a portfolio, with returns based on how well the portfolio’s underlying investments do. The fund itself makes most of its money from the fees ...
An income trust is an investment that may hold equities, debt instruments, royalty interests or real properties. It is especially useful for financial requirements of institutional investors such as pension funds , [ 1 ] and for investors such as retired individuals seeking yield.
For a cash flow hedge, some of the derivative volatility is placed into a separate component of the entity's equity called the cash flow hedge reserve. Where a hedge relationship is effective (meets the 80%–125% rule), most of the mark-to-market derivative volatility will be offset in the profit and loss account. Hedge accounting entails much ...
Cash flow matching is a process of hedging in which a company or other entity matches its cash outflows (i.e., financial obligations) with its cash inflows over a given time horizon. [1] It is a subset of immunization strategies in finance. [2] Cash flow matching is of particular importance to defined benefit pension plans. [3]
Supply and demand affect prices, especially in the case of market participants who are constrained in the investments they make. Insurance companies and pension funds usually have long term liabilities that they wish to hedge, which requires low risk, predictable cash flows, such as long dated government bonds.