Foreign currency risk in a firm commitment as a fair value hedge

Foreign currency risk in a firm commitment as a fair value hedge

Foreign currency risk associated with a firm commitment can be designated as a fair value hedge only. Explain.

No. A hedge of the foreign currency risk associated with such firm commitments may be designated as a cash flow hedge or as a fair value hedge. The reason is that as far as the foreign exchange risk is concerned, it affects both the fair value of the hedged item as well as the cash flows associated with the same.

A hedge of foreign currency risk associated with a highly probable forecasted transaction to deal with a non-financial item can be designated only as a cash flow hedge and not as a fair value hedge.