F6M3 Flashcards
Derivative Instrument
derives its value from the value of some other instrument
requires NO initial investments
terms require or permit a cash settlement
Underlying
specified rate or other variable
Strike price
break even point
Notional amount
how many shares
value/settlement amount
paid by loser @ expiration date
hedging
reducing risk of holding/trading asset and liabilities
offset potential losses
OFFS
options
future
forwards
swaps
Option - long
buy/owns a right
Option - short
sell/write/has a contingent obligation
Call option
holder has the right to BUY for a specified price at a specified time
BUY UP
SELL DOWN
Put option
gives the holder the right to SELL as a specified time
BUY DOWN
SELL UP
Futures contract
publicly traded
more liquid
obligated to perform according to contract terms
made through a clearing house
Standardized notional amounts
future - long
buy
profit if it goes up
future - short
sell
profit if it goes down
Forward
same as the future but it is private OTC
less liquid
Swap contract
equivalent to a series of forward contracts
Market risk
risk that the entity will incur a loss
Credit risk
risk that the other party will not perform according to the contract terms
Derivative instrument valuation
balance sheet as asset or liability
measured at FV
gain or loss on a NO hedging designatio
earnings on IS
Cash flow hedging
hedges exposed to variability in expeced future cash flows
effective cash flow hedge
OCI
ineffective cash flow hedge
earnings
long hedge
inflows go UP in the future
offset risk that the cost of the asset you will buy in the future go UP in value
short hedge
inflows DOWN in the future
offset risk that you SELL in the future will go DOWN in value
Foreign currency fair value hedge
earnings
foreign currency net investment hedge
change in FV are reported in OCI as cumulative translation adjustment for EFFECTIVE
ineffective in earnings
Cash flow with no hedge
investing or if they are trading, operatng
cash flow if there is hedge
same cash flow as the item hedged
Qualified derivative
used to (designated) to hedge exposure to variable in cash flow associated with asset, liability, or forecasted transaction