A company holds a fixed rate debt security, the fair value of which will change as interest rates change. It may hedge this interest rate exposure. The issuer of such a security could, similarly, designate the liability as a hedged item.
A company has borrowed money at a variable rate of interest. It enters into an interest rate swap under which it pays fixed and receives floating. This is a hedge of future transactions – what is being hedged here is the interest rate exposure inherent in its liability to make future interest payments.
A company has a contractual commitment to purchase fuel oil at a fixed price. The fair value of this firm commitment will vary as fuel oil prices change. The company can designate its firm commitment as a hedged item, and enter into a commodity contract that will hedge the fair value changes.
