Three points are worth noting.
Hedge designations are critical. Each hedging relationship should fit into the company’s risk management objectives and strategy, which must be documented.
Hedging must be effective. To qualify for hedge accounting, an entity must demonstrate a hedging relationship to be highly effective in achieving offsetting changes in fair value or cash flows for the risk being hedged. “Highly effective” has been interpreted to mean a correlation ratio between 80% to 125% (this is the change in value of the derivative divided by the change in value of the hedged item).
Hedge ineffectiveness can lead to earnings volatility. A foreign currency derivative that cannot be shown to be effective in hedging a specific foreign currency risk must be marked to market and any gain or loss on it included in current earnings, making reported earnings more volatile.