Derivative Benefits, Risks, and Issuer and Investor Uses Flashcards
What are “structured notes”?
a broad category of securities that incorporate the features of debt instruments and one or more embedded derivatives designed to achieve a particular issuer or investor objective.
What is “Basis Risk”?
The possibility that the expected value of a derivative differs unexpectedly from that of the underlying.
What is a derivative’s “Liquidity Risk”?
A divergence in the cash flow timing of a derivative versus that of an underlying transaction.
What is a derivative’s “Systemic Risk”?
Refers to the risk that supervisory authorities believe are likely to have broad impact across financial market infrastructure and affect a wide swath of market participants.
What is “Hedge Accounting”?
Accounting standards that allow an issuer to offset a hedging instrument against a hedged transaction or balance sheet item to reduce financial statement volatility.
What is a “Cash Flow Hedge”?
A specific classification of hedge in which a derivative is designed as absorbing the variable cash flow of a floating-rate asset or liability, such as foreign exchange, interest rates, or commodities.
What is a “Fair Value Hedge”?
An accounting designation that applies when a derivative is deemed to offset the fluctuation in fair value of an asset or liability.
What is a “Net Investment Hedge”?
A hedge designation that applies when either a foreign currency bond or a derivative, such as an FX swap or forward, is used to offset the exchange rate risk of the equity of a foreign operation.
