Where a hedge relationship is effective (meets the 80%–125% rule), most of the mark-to-market derivative volatility will be offset in the profit and loss account.
For example, gold mines are exposed to the price of gold, airlines to the price of jet fuel, borrowers to interest rates, and importers and exporters to exchange rate risks.
For many entities this would result in a significant amount of profit and loss volatility arising from the use of derivatives.
A specific type of hedging transaction that entities can engage in aims to manage foreign currency exposure.
These hedges are undertaken for the economic aim of reducing potential loss from fluctuations in foreign exchange rates.