F6/M4 Derivatives and Hedge accounting

Question 1

Underlying

Answer 1

• Strike Price
• FX Rate
• Interest Rate

Question 2

Notional Amount

Answer 2

• Unit of measure (Currency units)

Question 3

Value or Settlement amount

Answer 3

Amount paid by loser

Notional amount x Underlying

Question 4

When a hedge is effective,

Answer 4

The change in the value of the derivative offets the change in the value of the hedged item or the cash flows from the hedged item

Question 5

Types of Derivatives (OFFS)

Answer 5

Options Forwards Futures Swaps

Question 6

Call Option

Answer 6

Right to Buy at specific price

Question 7

Put Option

Answer 7

Right to Sell at specific price

Question 8

Options have an initial outflow

Answer 8

Options are an asset

Question 9

Forwards, Futures and Swaps have no initial outflow

Answer 9

True; no cost

Question 10

Future contracts

Answer 10

Agreements to transact

- made through a clearinghouse and have standardized notional amounts and settlement dates

Question 11

Difference between forwards and futures

Answer 11

Forwards are private, whereas futures are publicly traded

Question 12

Swaps (Hope what you receive > what you pay)

Answer 12

Exchange future cash payments
Common swaps;
- Interest rates
- Currency swaps
- Copmpdity

Question 13

All derivative instruments have to be represented on the Balance Sheet as an asset or liability at fair value

Answer 13

True

Question 14

No hedging designation = G/L on Income Statement

Answer 14

Same as Trading security

Question 15

Fair Value Hedge

Answer 15

When you already have an asset/liability on your balance sheet

Gains/Losses go on Income statement (must be highly effective)

Question 16

*** Cash Flow hedge (PUF.E.)

• No purchase commitment is made (“will need to purchase”)

Answer 16

Hedging the exposure to variability in expected future cash flows attributed to a particular risk

Effective Portion of cash flow hedge goes to OCI

Ineffective portion of cash flow hedge is reporting in Income Statement

Question 17

Long Cash Flow Hedge

Short Cash Flow Hedge

Answer 17

Risk is that the item you BUY in future increases in value

Risk that the item you SELL goes down in value

Question 18

(T/F): A loss must be recognized on a firm purchase commitment when the contract price to buy exceeds the market price

Answer 18

True; Fair Value Hedge

Question 19

JE to record a loss on firm purchase commitment @ B/S date (income statement)

Answer 19

Dr: Loss on firm purchase commitment
Cr: Firm Purchase Commitment Liability

• Use the Underlying figures, not hedge figures
• Applicable to Fair Value Hedge

Question 20

JE to record the gain on Forward contract hedge (Income statement)

Answer 20

Dr: Fair Value Hedge
Cr: Gain on Fair Value Hedge

Question 21

Under a Cash Flow Hedge, the gain in OCI for the effective portion of the hedge will be recognized in Income when

Answer 21

the inventory is sold

Question 22

Foreign Currency Fair Value Hedge

Answer 22

Gain/loss on Income Statement

Question 23

Foreign Currency Cash Flow Hedge

Answer 23

Effective Portion -> OCI

Ineffective Portion -> I/S