Derivatives Hedging

Question 1

How are derivatives recorded?

Answer 1

At cost when acquired re-valued to fair value each period on Balance Sheet.

Question 2

How are unrealized gains/losses on trading securities recorded?

Answer 2

Recorded on income statement

Question 3

How are gains and losses on Available for Sale (AFS) securities recorded?

Answer 3

They are included in Other Comprehensive Income.

Question 4

What is a Fair Value Hedge? How is it recorded?

Answer 4

“Fair Value Hedge offsets exposure to changes in the value of a recognized asset/liability or of an unrecognized commitment

Initially recorded on Balance Sheet at Fair Value

Gains/Losses recorded on Income Statement”

Question 5

What is a Cash Flow Hedge? How is it recorded?

Answer 5

“Cash flow hedges protect from exposure to fluctuations in cash flows.

Initially recorded on Balance Sheet at Fair Value

Gains/Losses going to OCI

Example: A cereal company enters into a futures contract on grain purchases to offset the risk that grain will go up in price.”

Question 6

Where are gains and losses on foreign currency hedges recorded?

Answer 6

In Other Comprehensive Income (OCI)

Question 7

What disclosures are required for derivative transactions?

Answer 7

“Objectives and Strategies

Context to help investor understand the instrument

Risk Management Policies

Complete List of Hedged Instruments”