Is it a trading security or held-to-maturity or a available-for-sale type of security? Thanks koch
By default derivatives are trading security. However, if used for hedging and meet all the hedging accouting requirement, they can be used to ensure the timing for the recognition of gain/loasses in the same for both the hedged item and the hedging item. In other words, you can time the hedging gain/loss recognition with the underlying.
The classic CF hedge (as contrasted with fair value, or net investment hedges, per FAS 133) is to swap a floating payment stream into a fixed. Say you’ve issued a FRN and wish to remove the cash flow uncertainty: you enter a pay-fixed swap. Google for more; here’s the first hit: http://www.kawaller.com/fas_qual_cash.shtml