Derivatives And Hedge Acct.

Question 1

Deritivatives

Answer 1

Financial instrument with all 3:
An underlying
A notional amount (no initial investment )
And a net settlement

Question 2

Underlying

Answer 2

Specified price or rate (such as stock price)

Question 3

Notional amount

Answer 3

Specified unit of measure (such as #of shares)

Used to calculate G/L

Question 4

Value or Settlement amount

Answer 4

(Paid by loser at expiration) Determined by the underlying being multiplied by notional amount
(Such as 100shares x $20 per share)

Question 5

Hedging

Answer 5

The use of derivatives to offset anticipated losses or to reduce earnings unpredictability

Question 6

No hedging designation G/L

Answer 6

Gains or losses on a derivative instrument not designated as a hedging instrument are recognized currently in earnings

Question 7

FV hedge

Answer 7

(Used to hedge FV of inventory)
Included in Current earnings (net income) as an offset to the gain or loss from the change in fair value of the hedge item.

Question 8

Cash flow hedge (2)

Answer 8

Effective portion : included in OCI until hedged transaction impacts earnings

Ineffective portion : included in current earnings

Associated with assets and forecasted transactions

Question 9

Foreign exchange hedge (3)

Answer 9

FV hedge
And
Cash flow hedge

Net investment hedge : included in OCI as cumulative translation adjustment

Question 10

Common types of derivatives

Answer 10

OFFS

option contracts
Forward contract
Future contract
Swap contract (usually swapping fixed interest rate for a variable interest rate)

Question 11

Put option (option contract)

Answer 11

Gives the holder the right to sell to the option writer at a specified price during a specified period of time

Question 12

All derivative instruments are:

Answer 12

• recognized in the balance sheet as either asset or liability
• all derivative instruments are measured at FV
• Accounting for changes in the fair value of a derivative is dependent on whether the derivative has been designated as a hedge as well as the reason for holding the instrument

Question 13

Long hedge

Answer 13

The offset for the risk that the cost of the asset you will buy in the future goes up in value ; outflows

Question 14

Short hedge

Answer 14

The offset for the risk that the asset you sell in the future will go down in value; inflows