What distinguishes an eligible hedged item from an eligible hedged instrument?

The correct choice highlights the fundamental distinction between a hedged item and a hedged instrument. A hedged item refers to the underlying asset, liability, or anticipated transaction that is at risk of changes in fair value or cash flows due to certain market factors, such as interest rates, foreign currency exchange rates, or commodity prices. In contrast, a hedged instrument is the financial derivative or other contract that is specifically designated to offset the risk associated with the hedged item.

Understanding this difference is crucial in financial reporting, particularly in the context of applying hedge accounting under accounting standards such as IFRS 9 or ASC 815. The hedged item is what you are trying to protect against fluctuations, while the hedged instrument is what you utilize to mitigate that risk. Recognizing this distinction allows for accurate reporting of hedging relationships and their effectiveness in financial statements.