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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.
BREAKING DOWN 'Inflation Hedge'. Certain investments might seem like a decent return, but when inflation is factored in they can actually be sold at a loss. For example if you invest in a stock that gives a 5% return, but inflation is 6%, you are actually losing buying power. Assets which are considered an inflation hedge could be self fulfilling; investors flock to them, which keeps their values high even though the intrinsic value may be much lower.