Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

FAR > Derivative & Hedging - 19 > Flashcards

Derivative & Hedging - 19 Flashcards

1
Q

What is the difference between a foreign currency transaction & translation?

A

FC Transaction - An A/P or A/R established where the money paid or received must undergo a FC conversion

FC Translation - Entire FS demoninated in a FC which must be converted to US dollars

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What two disclosures are required for FC transactions?

A
  1. Aggregate gain/loss from FC transactions included in the entities NI
  2. Significant changes subsequent to the date of the FS
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are examples of Financial Instruments?

A 
Cash
Account/Noted Receivable
Account/Notes Payable
Bonds
Common Stock
Preferred Stock
Stock Options
FC Forward Contracts 
Futures Contracts
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the three types of hedges?

A
  1. Fair Value Hedge
  2. Cash Flow Hedge
  3. Foreign Currency Hedge
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is a Fair Value hedge?

A

A hedge on the exposure to changes in the FV of a recognized asset or liability or unrecognized firm commitment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is a Cash Flow hedge?

A

A hedge of the exposure to variability in the cash flows of a recognized asset or liability or a forecasted transaction (Purchase Order)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is a Foreign Currency hedge?

A

A hedge of the foreign currency exposure of an unrecognized firm commitment, an AFS security, a forecasted transaction, or a net investment asset in a foreign operation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the two reasons to have a derivative?

A
  1. To Hedge (offset g/l of operation)

2. For speculation (basically gambling as you are hedging against the market moving against you)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What three things must be present in a derivative instrument?

A
  1. An underlying - what causes the risk - any financial or physical variable that has either observable or objectively verifiable changes
  2. A notional amount - the number of units
  3. A Settlement amount -
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is excluded from derivative?

A 
Normal purchases
Equity Securities (Common Stock)
Debt Securities
Leases
Mortgage Backed Securities
Employee Stock Options
Royalty Agreements and other contracts tied to sales volumes
Variable Annuity Contracts
Adjustable Rate Loans
Guaranteed Investment Contracts
Non-exchanged traded companies tied to physical variables
Derivatives that serve as impediments to sales accounting
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is included in being a derivative?

A 
Call & Put Options
Futures Contracts
Interest Rate Swaps
Currency Swaps
Swaptions
Credit Indexed Contracts
Interest Rate Caps/Floor/Collars
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is an example of an embedded derivative?

A

Convertible Bond Payable - because the stock options are embedded in the bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is bifurcation?

A

Splitting an embedded derivative from it’s host and accounted for in the derivate way

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What three criteria are used to determine if bifurcation must occur?

A
  1. The embedded derivative meets the definition of a derivative
  2. The hybrid instrument is not regularly recorded at Fair Value
  3. The economic characteristics & risks of the embedded derivative instrument are not clearly and closely related
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Must bifurcation be used if the three criteria are met?

A

No - it is an election by the holder. If bifurcation is not elected, the entire instrument is valued at fair value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are the two primary criteria that must be met in order for a derivative instrument to qualify as a hedging instrument?

A
  1. Sufficient documentation at the beginning of the process

2. The hedge must be highly effective

17
Q

For an unrecognized firm commitment to qualify as a hedged item, it must:

A
  1. Be binding on both parties
  2. Be specific with respect to all significant terms
  3. Contain a nonperformance clause that makes performance probably
18
Q

What specific criteria must be met in order to qualify as a cash flow hedge?

A

The hedging instrument must be linked

19
Q

Where to effective and ineffective portions get reported?

A

Fair Value Hedges - I

Cash Flow Hedge - Effective - OCI; Ineffective - I

20
Q

What are four areas of FC Hedges and how are they treated?

A
  1. Unrecognized Firm Commitment - FV Hedge
  2. AFS Securities - FV Hedge
  3. FC Denominated Forecasted Transactions - Cash Flow Hedge
  4. Net Investment in Foreign Operations - Cash Flow Hedge
21
Q

Disclosures related to financial instruments, both derivatives and non-derivative, that are used as hedging instruments, must include?

A
  1. Objectives & the strategies for achieving them
  2. Context to understand the instrument
  3. risk management policies
    4 List of hedged instruments
22
Q

What are the characteristics of a derivative?

A
  1. One or more underlyings or notional amounts
  2. No or small initial net investment
  3. Terms that require or permit a net settlement
23
Q

When is credit risk required to be disclosed?

A

When it exists

24
Q

Does credit risk disclosure require the names of the parties involved?

A

No

FAR (28 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions