Answer: cash flow hedge.

## Explanation This question tests the understanding of different types of hedging relationships under accounting standards (such as IFRS or US GAAP). **Key Concepts:** 1. **Fair Value Hedge**: A hedge of the exposure to changes in the fair value of a recognized asset or liability, or an unrecognized firm commitment, that is attributable to a particular risk and could affect profit or loss. 2. **Cash Flow Hedge**: A hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognized asset or liability (such as all or some future interest payments on variable-rate debt) or a highly probable forecast transaction, and that could affect profit or loss. 3. **Net Investment Hedge**: A hedge of a foreign currency exposure of an investment in a foreign operation. **Analysis:** - The question specifically mentions "absorb the variable cash flow of a floating-rate asset." - Floating-rate assets have cash flows that vary with changes in interest rates (e.g., floating-rate bonds, loans with variable interest). - Hedging the variability in these cash flows due to interest rate changes is a classic example of a **cash flow hedge**. - In a cash flow hedge, the hedging instrument (such as an interest rate swap) is used to convert floating-rate cash flows into fixed-rate cash flows, thereby eliminating the variability. **Why not the other options?** - **Fair Value Hedge (A)**: This would hedge changes in the fair value of the asset itself, not the variability of its cash flows. For example, hedging the fair value of a fixed-rate bond against interest rate changes. - **Net Investment Hedge (C)**: This relates to hedging foreign currency exposure of investments in foreign operations, not interest rate cash flow variability. **Conclusion:** The correct answer is **B. cash flow hedge** because the transaction is designed to manage the variability in future cash flows from a floating-rate asset.

Author: LeetQuiz .