F6/M4 Derivatives and Hedge accounting Flashcards
Underlying
- Strike Price
- FX Rate
- Interest Rate
Notional Amount
- Unit of measure (Currency units)
Value or Settlement amount
Amount paid by loser
Notional amount x Underlying
When a hedge is effective,
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
Types of Derivatives (OFFS)
Options Forwards Futures Swaps
Call Option
Right to Buy at specific price
Put Option
Right to Sell at specific price
Options have an initial outflow
Options are an asset
Forwards, Futures and Swaps have no initial outflow
True; no cost
Future contracts
Agreements to transact
- made through a clearinghouse and have standardized notional amounts and settlement dates
Difference between forwards and futures
Forwards are private, whereas futures are publicly traded
Swaps (Hope what you receive > what you pay)
Exchange future cash payments Common swaps; - Interest rates - Currency swaps - Copmpdity
All derivative instruments have to be represented on the Balance Sheet as an asset or liability at fair value
True
No hedging designation = G/L on Income Statement
Same as Trading security
Fair Value Hedge
When you already have an asset/liability on your balance sheet
Gains/Losses go on Income statement (must be highly effective)
*** Cash Flow hedge (PUF.E.)
- No purchase commitment is made (“will need to purchase”)
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
Long Cash Flow Hedge
Short Cash Flow Hedge
Risk is that the item you BUY in future increases in value
Risk that the item you SELL goes down in value
(T/F): A loss must be recognized on a firm purchase commitment when the contract price to buy exceeds the market price
True; Fair Value Hedge
JE to record a loss on firm purchase commitment @ B/S date (income statement)
Dr: Loss on firm purchase commitment
Cr: Firm Purchase Commitment Liability
- Use the Underlying figures, not hedge figures
- Applicable to Fair Value Hedge
JE to record the gain on Forward contract hedge (Income statement)
Dr: Fair Value Hedge
Cr: Gain on Fair Value Hedge
Under a Cash Flow Hedge, the gain in OCI for the effective portion of the hedge will be recognized in Income when
the inventory is sold
Foreign Currency Fair Value Hedge
Gain/loss on Income Statement
Foreign Currency Cash Flow Hedge
Effective Portion -> OCI
Ineffective Portion -> I/S
