I believe 94 % effective means it is effective, I remember I read read some where that International Accounting Standard or IFRS is defining some percentage which is required to get hedge effective. So there are 2 options either it is effective of in effective.
If its change in value equals that of the item (fair value, cash flow, whatever) that you’re hedging, that portion is effective. If its change in value is more or less than that of the item that you’re hedging, the difference is ineffective. A hedge can be part effective and part ineffective; usually it is.
Ineffective portion is reported in earnings immediately, but the text doesn’t address this. So, gotta know what the CFAI wants you to know and leave it at that, is my view.
You are right. That’s why they encourage everyone to read study text. Basic theme to read text is that they want people to understand testing style and approach of CFAI.
While i dont know anything on this beyond whats in the curriculum, but when i answered this question, i refered to three bullet points (on page-309 & 310) of the curriculum.
the second point (hedge exposure to variable cash flow) is applicable for this problem, and in curriculum it only talks about the effective part…and nothing on ineffective.
Reading 22: In the two bulleted items at the top of p. 310, insert “other” before “comprehensive income.” In Practice Problem 6 (p. 313), change “net income” to “other comprehensive income” in options A and B, and insert “other” before “comprehensive income” in option C. Solution C remains correct.
I think this clears it. We no longer have two correct answer choices