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<p>If a company uses a metal as a raw material in one of its products and <strong><span>hedge the price of that raw material using a derivative (futures or forwards).</span></strong></p> <p><strong><span>Will the hedge be a Fair Value Hedge or Cash Flow Hedge?</span></strong></p>
It's a cash flow hedge as they are using forward contract in order to fix the price of the material and manage the cash outflow in future.
Its Fair Value Hedge
what kind of item we are hedging its very important tool to identify.
Fixed item or Variable Item
For Example:
1-Fixed interest Loan, Fixed Interest Bond, Inventories and Unrecognized commitment of Firm all these are Fixed Item
2- Variable Interest loan , Variable Interest Bond all these are variable item
And when it comes to hedging fixed items, then you’re practically dealing with the fair value hedge.
Its a simple Fair Value Hedge, as the company is worried of future price of metal and most importantly that metal is not purchased yet it will be purchased means it not yet realized as asset. While in Cash Flow hedge we try to hedge what we already have.
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