Hedging and Use of Derivatives Intel reports the following in its Form 10-K for fiscal 2018.

We are exposed to currency exchange risks of non-U.S.-dollar-denominated investments in debt instruments and loans receivable, and may economically hedge this risk with foreign currency contracts, such as currency forward contracts or currency interest rate swaps. Gains or losses on these non-U.S.-currency investments are generally offset by corresponding losses or gains on the related hedging instruments. We are exposed to currency exchange risks from our non-U.S.-dollar denominated debt indebtedness and may use foreign currency contracts designated as cash flow hedges to manage this risk.

Substantially all of our revenue is transacted in U.S. dollars. However, a significant portion of our operating expenditures and capital purchases are incurred in other currencies, primarily the euro, the Japanese yen, the Israeli shekel, and the Chinese yuan. We have established currency risk management programs to protect against currency exchange rate risks associated with non-U.S. dollar forecasted future cash flows and existing non-U.S. dollar monetary assets and liabilities. We may also hedge currency risk arising from funding of foreign currency-denominated future investments. We may utilize foreign currency contracts, such as currency forwards or option contracts in these hedging programs.

Consider the first paragraph in Intels footnote. Indicate whether this describes fair value or cash flow hedges.

Answercash flow hedgefair value hedge Suppose, at year-end, there was an unrealized loss on Intels currency forward contracts described in the first paragraph. How would Intel report the derivative on the balance sheet? How would the income statement be affected?

How would Intel report the derivative on the balance sheet?

The unrealized loss would be included in the value reported on the balance sheet because currency forward contracts are reported at fair value.

The unrealized loss would not be included in the value reported on the balance sheet because currency forward contracts are reported at historical cost.

How would the income statement be affected?

Since the hedge is a fair value hedge, the unrealized loss would flow to income.

Since the hedge is a cash flow hedge, the unrealized loss would be held in AOCI until the anticipated expenditure occurs.

What is hedge ineffectiveness and how does it affect Intels income statement?

Hedge ineffectiveness arises when the fair value of a hedging instrument is not perfectly negatively related to the fair value of the hedged item. The ineffective portion of a hedge flows to the balance sheet in the current period.

Hedge ineffectiveness arises when the fair value of a hedging instrument is not perfectly negatively related to the fair value of the hedged item. The ineffective portion of a hedge flows to the income statement in the current period.

Hedge ineffectiveness arises when the fair value of a hedging instrument is not perfectly positively related to the fair value of the hedged item. The ineffective portion of a hedge flows to the income statement in the current period.

Hedge ineffectiveness arises when the fair value of a hedging instrument is not perfectly postitively related to the fair value of the hedged item. The ineffective portion of a hedge flows to the balance sheet in the current period.