Answer: The application of normal accounting rules to hedging transactions can increase the volatility of reported earnings.

## Explanation **Option A is correct** because when normal accounting rules are applied to hedging transactions, the hedging instrument and the underlying exposure are accounted for separately. This can create earnings volatility since gains and losses on the hedge may be recognized in different periods than the corresponding gains and losses on the underlying exposure being hedged. **Option B is incorrect** because hedging transactions are often treated differently for tax and accounting purposes. Tax authorities may have different rules for recognizing gains and losses on hedging instruments compared to financial accounting standards. **Option C is incorrect** because under hedge accounting, the gain or loss on the hedge is typically recognized in the same period as the gain or loss on the underlying exposure being hedged, which helps to reduce earnings volatility. The entire gain or loss is not necessarily realized in the year it occurs. **Option D is incorrect** because hedge accounting has specific requirements beyond mere disclosure. Companies must meet certain criteria such as formal documentation of the hedging relationship, effectiveness testing, and demonstrating that the hedge is highly effective in offsetting the risk being hedged.

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