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This guidance applies to companies which apply IFRS, New UK GAAP or FRS 26.

Cash flow hedges

»Ê¹ÚÌåÓýapp following are examples of cash-flow hedges. For a definition of a cash-flow hedge, see CFM27120.

Example 1

A company borrows £10 million at LIBOR plus 2%. Changes in LIBOR will affect the company’s future cash flows, as the amount it must pay will vary as the LIBOR rate moves. »Ê¹ÚÌåÓýapp company may hedge this risk by entering into an interest rate swap, in which it pays a fixed rate of interest but receives a variable one.

Example 2

A chocolate manufacturer assesses it as highly probable that it will buy 5,000 tonnes of cocoa in six monthsâ€� time, paying the spot rate at the time it places the order. Changes in cocoa prices will affect its future cash flows. »Ê¹ÚÌåÓýapp manufacturer may therefore purchase cocoa bean futures to hedge the exposure by ‘fixingâ€� the price it will pay.