Financial Instruments Flashcards
What is a derivative?
it is an exchange of promises where a set notional amount will be bought or sold in the future for an underlying
What is a financial instrument?
cash, evidence of an ownership interest in an entity, or a contract that both imposes a contractual obligation on an entity and conveys a contractual right to another entity
All derivatives are reported on an entity’s balance sheet as either assets or liabilities. At what value are they reported?
all derivatives are reported at their FV’s
All derivatives are reported on an entity’s balance sheet as either assets or liabilities. How is the change in FV reported?
any change in the FV of a derivative should be reported as a gain or loss in computing net income or other comprehensive income for the period, depending on specific circumstances
Define a hedge.
a hedge is a risk mitigating transactions attempt through the use of a derivative that is acquired for the purpose of offsetting gains and losses that would have to be recognized on other derivatives
If a derivative is documented as being acquired to hedge a financial instrument, how must the derivative be valued?
if a hedge is acquired and documented as a hedge of a financial instrument, the financial instrument must be reported at its FV even if that method of reporting is not normally appropriate.
What is meant by Credit Risk in terms of a hedged transaction?
the risk of changes in the value or cash flows impacted by an obligor’s creditworthiness, interest rate spreads with respect to the hedged item’s credit sector, and/or defuat
for example, if A guarantees the loan of X, A has credit risk. X does not pay the loan, will have a loss.
What must be disclosed with regards to the credit risk that an entity has?
for all financial instruments, significant concentrations of credit risk must be disclosed. A significant concentration is where a large amount of performance is required of a single party or by a group of similar parties
