Derivative Instruments

Question 1

A transaction dominated in a currency other than the entity’s functional currency

Answer 1

Foreign currency transaction–different from a foreign currency transalation

Question 2

A financial instrument that derives its value as a financial instrument from something else and must meet three specific criteria to qualify as such

Answer 2

Derivative instrument

Question 3

Derivative instruments that meet two primary criteria :

(1) sufficient documentation relating to its objective, identification, and assessment
(2) are highly effective

Answer 3

Hedging instruments

Question 4

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)

Answer 4

Two-transaction approach

Question 5

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

Answer 5

the “underlying” (stock price)

Question 6

The number of units related to teh derivative instrument

Answer 6

Notional amount

Question 7

A hede of the exposure to changes in the fair value of either a:

1) recognized asset/liability
2) unrecognized firm commitment

Answer 7

Fair value hedge

Question 8

A hedge to the exposure to variability in the cash flows of

1) a recognized asset/liability
2) a forecasted transaction

Answer 8

Cash flow hedge

Question 9

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

Answer 9

Foregin currency hedge

Question 10

Calculated using the underlying and the notional amount in some combination

Answer 10

Settlement amount

Question 11

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

Answer 11

Interset rate swap

Question 12

A financial contract, known as “the host contract” that has an embedded derivative contract within it that needs to be separataed from it

Answer 12

Hybrid instruments

Question 13

The process of separating an embedded derivative instrument from its host contract so that it can be accounted for under the rulse of derivatives

Answer 13

Bifurcation

Question 14

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

Answer 14

Linking

Question 15

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)

Answer 15

Credit risk

Question 16

The foreign currency amount of the contract multiplied by the difference between the forward rate and spot rate at teh date of inception

Answer 16

Discount or premium on a forward contract

Question 17

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

Answer 17

Forecasted transaction

Question 18

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

Answer 18

Forward contract

Question 19

An agreement to exchange at aspecified future date currencies of different countries at aspecified rate

Answer 19

Forward exchange contract

Question 20

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

Answer 20

Futures contract

Question 21

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

Answer 21

In the money

Question 22

The larger of zero or the spread between the exercise and stock price, with regard to call and put options

Answer 22

Intrinsic value

Question 23

A widely used measure of average interst rates at a point in time

Answer 23

LIBOR (Longon Interbank Offer Rate)

Question 24

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

Answer 24

Out of the money

Question 25

A forward-based contract or agreement generally between two counterparites to exchange streams of cash flows over a specfied period in the future

Answer 25

Swap

Question 26

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

Answer 26

Swaption

Question 27

The diffference between an options price and its intrinsic vlaue

Answer 27

Time value