Derivatives & Hedge Fund Accounting Flashcards
How should a U.S publicly traded company report a change in fair value of a hedged available-for-sale security attributable to foreign exchange risk if the hedge is a fair value hedge?
It should be reported in the earnings.
What is the difference between fair value and cash flow hedge?
- Fair Value Hedge is used for recognized assets and liabilities with changes in value reported on income statement.
- Cash flow hedge is used for forecasted transactions with changes in value reported in other comprehensive income.
In order to determine if a company’s investment in a financial instrument is a derivative which steps must you follow.
You must determine if the Derivative Instrument meets the NUNS characteristics.
N= no net investment
U= an underlying and a notional amount
S= Net settlement
How do you calculate for the intrinsic value for a purchased call options?
The equation for call option premium is Intrinsic value + Time value = Option premium.
Note to find intrinsic value the equation is (Market price - Exercise price) x Number of shares. This cannot be less than zero
What condition must be met before a non public company who wants to apply the simplified hedge accounting approach to a cash flow hedge of a variable-rate borrowing with a receive-variable, pay-fixed interest rate swap?
The variable interest rate on the interest rate swap and variable interest rate on the hedged borrowing are linked to the same index.
What is one important characteristic of a perfect hedge?
There is no possibility of future gain or loss
What is a derivative?
A derivative are financial instruments whose value is derived from an underlying asset(eg. stock, currency). Investors typically might opt to purchase derivatives to protect their investments from risk(ie, hedging) or profit from market changes(ie. speculation)
A hedge of the exposure to changes in the fair value of a recognized asset or liability, or firm purchase commitment is classified as a_______?
Fair Value Hedge
