A designated financial instrument whose fair value or related cash flows are meant to offset changes in the fair value or cash flows of a designated hedged item. Examples of a hedged item include any items designated as being hedged: assets, liabilities, commitments, investments in a foreign operation or highly probable transactions whereby an entity is exposed to changes in fair value or cash flows.
A hedging instrument could be a financial derivative (e.g., a forward contract), traded for hedging purposes. The hedging instrument creates an offsetting financial position that offsets the corresponding change in the hedged exposure (e.g., a foreign exchange transaction).
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