The correct answer is: D. risk mitigation activities, credit exposures.
Hedge accounting is a method of accounting for certain types of financial instruments that are used to hedge risks. The objective of hedge accounting is to represent, in the financial statements, the effect of an entity’s risk mitigation activities, that use financial instruments to manage exposures arising from particular risks that could affect profit or loss.
Hedge accounting is not required, but it is allowed for certain types of hedges. In order to qualify for hedge accounting, the hedge must meet certain criteria, such as the hedge being effective and the hedge being designated and documented at the inception of the hedge.
Hedge accounting can provide a number of benefits to an entity, such as:
- Increased transparency of the entity’s risk management activities
- Reduced volatility in the entity’s earnings
- Improved comparability of the entity’s financial statements
However, hedge accounting can also be complex and time-consuming to implement. As a result, entities should carefully consider whether hedge accounting is appropriate for their particular circumstances.
The following are brief explanations of each of the options:
- A. risk management activities, exposures: This option is incorrect because it does not specify that the exposures are credit exposures.
- B. risk mitigation activities, credit losses: This option is incorrect because it does not specify that the exposures are credit exposures.
- C. risk diversification activities, credit concentration: This option is incorrect because it does not specify that the exposures are credit exposures.
- D. risk mitigation activities, credit exposures: This option is correct because it specifies that the exposures are credit exposures.