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Chapter 3 — Fair Value Hedges

3.2 Financial Instruments and Mortgage Servicing Rights

3.2 Financial Instruments and Mortgage Servicing Rights

As discussed in Chapter 2, in a fair value hedge that involves existing financial assets and liabilities, an entity can designate a derivative instrument to hedge one or more specific risks of a hedged item. The table below summarizes the potential hedged items and risks in a fair value hedge of a financial asset, mortgage servicing right,1 or financial liability.

Footnotes

1
Although a mortgage servicing right is not a financial asset because the servicer is obligated to perform to receive the servicing fee, it is included in this section because certain aspects of the model for fair value hedges of financial assets also apply to hedges of mortgage servicing rights (e.g., the types of risks that may be hedged and the amortization of basis adjustments).
2
ASU 2022-01 modifies this language in ASC 815-25-35-13B to “using an assumed term that begins when the first hedged cash flow begins to accrue and ends at the end of the designated hedge period” (emphasis added).
4
For simplicity, we assume that the hedging relationship is not discontinued before the end of the hedging relationship.