Chapter 10 Section 10: Financial Instruments

Question 1

What risk is required to be disclosed in GAAP? IFRS?

Answer 1

GAAP: concentrated credit risk
IFRS: credit and market

Question 2

Define underlying

Answer 2

The specified price

Question 3

Define notional amount

Answer 3

The amount we are buying/selling

Question 4

Value or settlement amount

Answer 4

underlying x notional amount

Question 5

Define hedging

Answer 5

Using derivatives to offset anticipated losses

Question 6

Define call option

When do you profit?

Answer 6

Call means buy

You profit when the price goes up

Question 7

Define put option

When do you profit?

Answer 7

Put means sell

You profit when the price goes down

Question 8

Define long position

Answer 8

Long means buy

Question 9

Define short position

Answer 9

Short means sell

Question 10

Define swap contract

Answer 10

An agreement to exchange future cash payments

Question 11

What is the difference between a future and forward?

Answer 11

Forwards get rid of the clearinghouse

Question 12

How are gains and losses accounted for when there is no hedging designation?

Answer 12

They go on the I/S

Question 13

How are gains and losses accounted for when there is a fair value hedge?

Answer 13

I/S

Question 14

How are gains and losses accounted for when there is a cash flow hedge?

Answer 14

Ineffective = I/S
Effective = OCI

Question 15

How does a foreign currency net investment hedge account for gains and losses?

Answer 15

OCI