FAR 1.05-Financial Instruments and Derivatives

Question 1

In ASC Topic 815 DERIVATIVES AND HEDGING, are employee stock options reauired to be accounted for?

Answer 1

No (strangely enough).

Question 2

In ASC Topic 815 DERIVATIVES AND HEDGING, what items are required to be accounted for?

Answer 2

Futures contracts, interest rate caps, and options to purchase or sell exchange-traded securities

Question 3

Disclosures related to financial instruments must contain what things?

Answer 3

A. Documentation to show:

1. Hedge’s objective and strategy
2. Hedging Insturment & hedged item
3. How hedge’s affectiveness will be monitored on an ongoing basis

B. Hedge must be highloy effective through its live.

Question 4

Explain acronym “NUNS” and define each part.

Answer 4

1. No net investment-means no full investment of investment much smaller than full amount.
2. Underlying amount-factor that affects derivatives value(interest rate, exchange rate, etc.)
3. Notional amount-number of units involved
4. Net Settlement-can be settled for a net amount

Question 5

Define Fair value hedge

Answer 5

• hedges against firm commitment purchase
• G/L goes on I/S
• offset by G/L of hedged item

Question 6

Define Cash Flow hedge

Answer 6

• hedges against forecasted futre transaction
• G/L in OCI (B/S)
• included in net income only when forecasted activity occurs

Question 7

Define Foreign Currency hedge

Answer 7

• hedges against risk from investment in corporation whose functional currency not US dollar.
• G/L in OCI - B/S
• offsets translation G/L from investments in foreign operations.

Question 8

What are the 4 types of foreign currency hedges?

Answer 8

1. unrecognized firm commitment
2. available for sale security
3. foreign currency dominated forecasted transaction
4. net investment in foreign ops