Derivative Instruments Flashcards
A transaction dominated in a currency other than the entity’s functional currency
Foreign currency transaction–different from a foreign currency transalation
A financial instrument that derives its value as a financial instrument from something else and must meet three specific criteria to qualify as such
Derivative instrument
Derivative instruments that meet two primary criteria :
(1) sufficient documentation relating to its objective, identification, and assessment
(2) are highly effective
Hedging instruments
The viewpoint adopted by FASB in which making the sale is the result of an operating decision, while bearing the risk of fluctuation spot rates is the result of an investment decision (Therefore, the sales amount should not be altered due to fluctuating spot rates)
Two-transaction approach
The rate or price that exists outside the derivative instrument that is used to determine the value of the derivative instrument–may be any financial or physical variable that has either observable changes or objectively verifabe changes
the “underlying” (stock price)
The number of units related to teh derivative instrument
Notional amount
A hede of the exposure to changes in the fair value of either a:
1) recognized asset/liability
2) unrecognized firm commitment
Fair value hedge
A hedge to the exposure to variability in the cash flows of
1) a recognized asset/liability
2) a forecasted transaction
Cash flow hedge
A hedge of the foreign currency exposure of
1) an uncrecognized firm commitment
2) AFS security
3) forecasted transaction
4) net investment in a foreign operation
Foregin currency hedge
Calculated using the underlying and the notional amount in some combination
Settlement amount
A derivative instrument in which one party blieves the interst rate on their fixed-rate debt is going to drop and swaps interst payments with a party that believes the interest rate on their variable-rate date is going to rise
Interset rate swap
A financial contract, known as “the host contract” that has an embedded derivative contract within it that needs to be separataed from it
Hybrid instruments
The process of separating an embedded derivative instrument from its host contract so that it can be accounted for under the rulse of derivatives
Bifurcation
The primary criterion for a cash flow hedge which i established if htebasis for hte change in cash flows is the same for hedged asset/liability and the hedging instrument
Linking
The risk that a loss will occur because parties to the instrument do not perform as expected–exists when concentrations exist (i.e. a number of an entity’s financial instruments are associated with similar actviies)
Credit risk
The foreign currency amount of the contract multiplied by the difference between the forward rate and spot rate at teh date of inception
Discount or premium on a forward contract
A transaction that is expected to occur for which there is no firm commitment and thus which gives hte netity no present rights or oligations
Forecasted transaction
An agreement between two parties to buy and sell a specific quantity of a commodity, foreign currency, or financial instrument at an greed-upon price, with delivery and/or setlement at adisgnated future date
Forward contract
An agreement to exchange at aspecified future date currencies of different countries at aspecified rate
Forward exchange contract
A forward-based contract to amek or take delivery of adisgnated fnancial instrument, foreign currency, or commodity during a designated period, at specified price or yield; traded on a regulated exchange and therefore involves less credit risk than forward contracts
Futures contract
A call option is said to be this if the price of the underlying is greater than the strike or exercise price of the underlying
In the money
The larger of zero or the spread between the exercise and stock price, with regard to call and put options
Intrinsic value
A widely used measure of average interst rates at a point in time
LIBOR (Longon Interbank Offer Rate)
A call options is osaid to be this if the strike or exercise price is greater than the price of underlying; a put ption is this if the price is greater than teh strike price
Out of the money
A forward-based contract or agreement generally between two counterparites to exchange streams of cash flows over a specfied period in the future
Swap
An option on a swap that provides hte holder with the right to enter into a swap at specified future date at specied terms or to termine the life of an existing swap
Swaption
The diffference between an options price and its intrinsic vlaue
Time value
