What is a cash flow hedge primarily used for?

A cash flow hedge is primarily utilized to mitigate exposure to variability in cash flows, which can arise from both assets and liabilities. This type of hedge is designed to protect against potential future fluctuations in cash flows that could impact financial performance. For businesses, this variability often relates to forecasted transactions, such as sales revenue, purchases of goods, or the servicing of debt, where changes in market conditions could significantly affect cash inflows or outflows.

In particular, cash flow hedges are often employed in situations involving forecasted sales or purchases, where changes in commodity prices, foreign exchange rates, or interest rates may create uncertainty. By locking in prices or rates through derivative instruments, a company can ensure more stable cash flows and reduce the impact of volatility on its financial results.

The other choices relate to specific types of risk management but do not capture the broad applicability of cash flow hedges like the selected answer. Cash flow hedges encompass a wider range of scenarios beyond just liabilities or interest rate risks, making the selection the most encompassing and accurate choice.