FAR-Financial Instruments & Derivatives Flashcards
What is a put option?
The right to sell an asset (such as shares) but not the obligation
What is a call option?
The right to buy an asset (such as share) but not the obligation
Financial Instruments Include these three items:
COD: Cash, Ownership Interests, Derivative Contracts
What is arbitrage?
Taking advantage of price differentials in different markets. Allows to enter into potentially profitable transactions without a significant risk of loss.
What is a hedge?
A hedge is used as a derivative to reduce or eliminate risk.
Derivatives are financial instruments that have the following three characteristics:
Nuns: Notional Amount, Underlying, Net settlement
What is a notional amount?
In a derivative contract, it is the number of units in which the contract is based
What is an underlying?
In a derivative contract, it is what has an affect on the derivative amount, such as an interest rate.
What is a swap?
A swap is a contract in which two parties agree to exchange payments in the future based on the movement of some agreed-upon price or rate.
What is hedged with a Fair Value Hedge?
An asset, liability, or a firm purchase commitment
Where are changes recorded from a fair value hedge?
Income Statement; Operating
What is hedged with a Cash Flow Hedge?
A forecasted future transaction that is not firm in nature.
Where are changes recorded from a cash flow hedge
Other comprehensive Income (OCI)
Where are gains and losses from speculation recorded?
Income Statement; continuing operations
