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Derivatives that are designated as hedged items are subject to measurements under the hedge accounting requirements IFRS 9/IAS 39. Topic 815 states that all derivatives must be recorded at fair value as an asset or liability. The ability to apply hedge accounting is optional. If a derivative qualifies as a hedge, the gains or losses from the derivative will match or offset the gains or losses from the value of the underlying transaction. To qualify for hedge accounting, Topic 815 provides rules and procedures for hedge effectiveness testing.
Credit Derivative. What is a 'Credit Derivative'. A credit derivative consists of privately held negotiable bilateral contracts that allow users to manage their exposure to credit risk. Credit derivatives are financial assets such as forward contracts, swaps and options for which the price is driven by the credit risk of economic agents, such as private investors or governments.