CH 4. - Derivatives & Hedge Accounting

Question 1

Types of Investments in the Stock of Other Entities

Answer 1

0% - 20% = Adjusted Cost Method

20% - 50% = Equity Method

50% = Consolidation

Question 2

Fair Value Hedge vs. Cash Flow Hedge

Answer 2

Fair Value Hedge
Risk = Fair Value changes Assets/Liabilities

Fair Value Hedge
***Used for Recognized Assets & Liabilities (items w/ Fixed Values)
***Changes in Value Reported on Income Statement

Cash Flow Hedge
Risk = Uncertain variable Cash Flows

Cash Flow Hedge
***Used for Forecasted Transactions (Items w/ Variable Cash Flows)
***Changes in Value reported in Other Comprehensive Income

Question 3

Put Options

Answer 3

• Right to Sell the Stock at a Given Party
• Expect Stock will decline in Value
• Exercise if FMV of Stock < Strike Price

Question 4

Call Options

Answer 4

• Right to Buy the Stock from a given party
• Expect stock will increase value
• Exercise if FMV of Stock > Strike Price

Question 5

Disclosed Notes on the Financial Statement

Answer 5

• Disclosures of Concentration of Credit Risk presented by Activities
• Regions
• Economic Characteristics
• Maximum Amount of Potential Loss
• Mitigation Policies
• Collateral Requirements

Question 6

Derivative Instruments Characteristics (NUNS)

Answer 6

Derivatices are Financial Assets that have the following:

No Net Investment
Underlying & a
Notional amount
Settlement (Net)

Question 7

What is a Derivative?

Answer 7

A Financial Instrument whose value is derived from an Underlying Asset.

Investors purchase Derivatives to protect themselves from risks or profit from market changes.