Answer: offset the exchange rate risk of the equity of a foreign operation.

## Explanation A net investment hedge is a specific type of hedge accounting that addresses foreign currency exposure. Let's break down each option: **Option A: offset the fluctuation in the fair value of an asset or liability.** - This describes a **fair value hedge**, not a net investment hedge. Fair value hedges protect against changes in the fair value of recognized assets or liabilities. **Option B: absorb the variable cash flow of a floating rate asset or liability.** - This describes a **cash flow hedge**, not a net investment hedge. Cash flow hedges protect against exposure to variability in cash flows. **Option C: offset the exchange rate risk of the equity of a foreign operation.** - **CORRECT**. A net investment hedge specifically addresses the foreign currency exposure of a parent company's investment in a foreign subsidiary. When a parent company has a net investment in a foreign operation (like a subsidiary), changes in exchange rates affect the parent's equity investment in that foreign entity. A derivative (typically a forward contract or cross-currency swap) can be designated as a hedge of this net investment to offset the foreign currency translation risk. ### Key Points: 1. **Net Investment Hedge Purpose**: To hedge the foreign currency exposure arising from a parent's net investment in a foreign operation. 2. **Accounting Treatment**: Gains/losses on the hedging instrument (derivative) are recognized in Other Comprehensive Income (OCI) to offset the translation adjustments from the foreign operation. 3. **Contrast with Other Hedges**: - Fair Value Hedge: Hedges changes in fair value of recognized assets/liabilities - Cash Flow Hedge: Hedges variability in cash flows - Net Investment Hedge: Hedges foreign currency exposure of net investments This is a fundamental concept in hedge accounting under both IFRS and US GAAP.

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