Ch 5 Financial Instruments

Question 0

Gains and losses on the effective portion of cash flow hedges are reported…

Answer 0

In other comprehensive income until such time as the corresponding gain/loss on the hedged item is recognized as income

Question 1

Fair value hedge

Answer 1

A hedge designed to mitigate or eliminate a risk associated with an exposure to changes in fair value of a recognized asset or liability or a firm commitment is a fair value hedge.

Fair value hedge is recognized in income stmt in period in which the fb changed

Question 2

Derivative

Answer 2

Must have atleast one underlying and at least one notional amount, it must allow for net settlement, and must require no net initial investment, or one that is much lower than would ordinarily be necessary for the same response to changes in market conditions. If the amount invested is material, then the financial instrument is not a derivative.
Examples:
Interest rate swaps 
Currency futures 
Stock index options

Question 3

Interest rate swap

Answer 3

Agreement to pay interest at a fixed rate on a specific amount in exchange for the right to receive interest on the same specific amount at a variable rate is an interest rate swap ..which is a form of a derivative

Question 4

Perfect hedge

Answer 4

A hedge is a fin instrument that is designed to reduce risk and a perfect hedge is one that eliminated the risk entirely. Eliminating the risk in it’s entirety protects an entity from losses associated with the risk but also prevents it from benefiting from gains associating with it.

Question 5

Derivative gains reported in income from continuing operations

Answer 5

Changes in the value of fair value hedges, changes in values of net investment hedges, and the ineffective portion of cash flow hedges are reported on the income statement as part of the income from continuing operations.

Question 6

Derivative changes reported in other comprehensive income

Answer 6

Changes in the effective portion of cash flow hedges