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Answer: A currency forward contract designated to offset the foreign exchange risk of equity in a foreign operation is an example of a net investment hedge.
**Explanation:** - **Option A** is incorrect because a foreign exchange forward contract hedging forecasted sales (a forecasted transaction) is an example of a cash flow hedge, not a fair value hedge. It addresses variable cash flows rather than changes in fair value. - **Option B** is incorrect because a commodity futures contract used to hedge inventory is an example of a fair value hedge, not a cash flow hedge. It offsets fluctuations in the fair value of the inventory. - **Option C** is correct because a currency forward contract designated to offset the foreign exchange risk of equity in a foreign operation aligns with the definition of a net investment hedge. This type of hedge protects the net investment in a foreign subsidiary from currency risk.
Author: LeetQuiz Editorial Team
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With respect to hedge accounting designation types, which of the following statements is correct?
A
A foreign exchange forward contract used to hedge forecasted sales is an example of a fair value hedge.
B
A commodity futures contract employed to hedge inventory is an example of a cash flow hedge.
C
A currency forward contract designated to offset the foreign exchange risk of equity in a foreign operation is an example of a net investment hedge.
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