This chapter explains the key fraud risks associated with derivatives and hedging. Fair value accounting plays a prominent role in the accounting for derivatives under both U.S. GAAP and IFRS. An embedded derivative instrument must be separated from the host contract and accounted for as a derivative instrument if certain criteria are met. Hedges are designed to provide protection against specific types of risk. A hedged item can be an individual asset or liability, groups of assets or liabilities, or certain other items, such as forecasted transactions. An entity must define a method of assessing a hedge's effectiveness at the time it designates a hedging relationship, and it must continue to apply that method throughout the hedge period. If an entity identifies an improved method that it wishes to apply for assessing effectiveness, it must discontinue the existing hedging relationship and designate the relationship all over using the improved method.