F6M3

Question 1

Derivative Instrument

Answer 1

derives its value from the value of some other instrument

requires NO initial investments

terms require or permit a cash settlement

Question 2

Underlying

Answer 2

specified rate or other variable

Question 3

Strike price

Answer 3

break even point

Question 4

Notional amount

Answer 4

how many shares

Question 5

value/settlement amount

Answer 5

paid by loser @ expiration date

Question 6

hedging

Answer 6

reducing risk of holding/trading asset and liabilities

offset potential losses

Question 7

OFFS

Answer 7

options
future
forwards
swaps

Question 8

Option - long

Answer 8

buy/owns a right

Question 9

Option - short

Answer 9

sell/write/has a contingent obligation

Question 10

Call option

Answer 10

holder has the right to BUY for a specified price at a specified time

BUY UP
SELL DOWN

Question 11

Put option

Answer 11

gives the holder the right to SELL as a specified time

BUY DOWN
SELL UP

Question 12

Futures contract

Answer 12

publicly traded

more liquid

obligated to perform according to contract terms

made through a clearing house

Standardized notional amounts

Question 13

future - long

Answer 13

buy

profit if it goes up

Question 14

future - short

Answer 14

sell

profit if it goes down

Question 15

Forward

Answer 15

same as the future but it is private OTC

less liquid

Question 16

Swap contract

Answer 16

equivalent to a series of forward contracts

Question 17

Market risk

Answer 17

risk that the entity will incur a loss

Question 18

Credit risk

Answer 18

risk that the other party will not perform according to the contract terms

Question 19

Derivative instrument valuation

Answer 19

balance sheet as asset or liability

measured at FV

Question 20

gain or loss on a NO hedging designatio

Answer 20

earnings on IS

Question 21

Cash flow hedging

Answer 21

hedges exposed to variability in expeced future cash flows

Question 22

effective cash flow hedge

Answer 22

OCI

Question 23

ineffective cash flow hedge

Answer 23

earnings

Question 24

long hedge

Answer 24

inflows go UP in the future

offset risk that the cost of the asset you will buy in the future go UP in value

Question 25

short hedge

Answer 25

inflows DOWN in the future

offset risk that you SELL in the future will go DOWN in value

Question 26

Foreign currency fair value hedge

Answer 26

earnings

Question 27

foreign currency net investment hedge

Answer 27

change in FV are reported in OCI as cumulative translation adjustment for EFFECTIVE

ineffective in earnings

Question 28

Cash flow with no hedge

Answer 28

investing or if they are trading, operatng

Question 29

cash flow if there is hedge

Answer 29

same cash flow as the item hedged

Question 30

Qualified derivative

Answer 30

used to (designated) to hedge exposure to variable in cash flow associated with asset, liability, or forecasted transaction