A type of hedge that is applied to foreign currency exposure in order to eliminate or reduce the risks associated with a business’ net investment in a foreign operation (NIFO). The foreign exchange gains or losses will be recognized in owners’ equity upon consolidation (subsidiary-parent). This hedge helps reduce this type of volatility in owners’ equity.
Net investment hedges are constructed using: 1) derivative instruments (e.g., a currency forward contract); 2) non-derivative instruments (a debt instrument denominated in a foreign currency); or 3) or a combination of both types (derivatives and non-derivatives).
