4-Derivatives & Hedge Accounting

Question 1

Derivative

Answer 1

Contracts that create both an obligation to transfer one or more financial instruments by one entity and a right to receive one or more financial instruments by another entity

Question 2

Derivatives are always reported at _____

Answer 2

Fair value

Question 3

Unrealized gains/losses on cash flow hedges are temporarily recognized in _____

Answer 3

OCI instead of income

Question 4

Unrealized gains/losses on fair value hedges are recognized in _____

Answer 4

Income along with offsetting losses or gains on the hedged item

Question 5

Derivatives are financial instruments that have the following 3 characteristics: (NUNS)

Answer 5

No net investment
An Underlying and Notional amount
Net Settlement

Question 6

Examples of derivatives:

Answer 6

Option contract: has the right but not obligation to purchase/sell in the future
Futures contract: has the right and obligation to deliver/purchase foreign currency or goods in the future at a set price today
Forward contract: has the right and obligation to buy or sell a commodity at a future date for an agreed upon price
Interest rate or foreign currency swap

Question 7

Fair value hedge

Answer 7

If the derivative is hedging against a recognized asset or liability on the balance sheet then changes in the value of the derivative are reported in income from continuing operations

Question 8

Cash flow hedge

Answer 8

If the derivative is hedging against a forecasted transaction that is expected to take place in the future then changes in the value of the derivative are reported as direct adjustments to stockholders equity and included in OCI