Financial instruments and derivatives Flashcards

1
Q

What is a derivative financial instrument?

A

A contract that has its settlement value tied to an underlying notional amount. (technical definition)
Contract whose value is based on another contract or an underlying index.

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2
Q

A derivative possesses what three characteristics?

A
  • It calls for net settlement in cash
  • It has one or more underlyings and notional amounts
  • It requires no significant net investment
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3
Q

How is the intrinsic value calculated?

A

Intrinsic value of a stock option is the market price less the strike price (exercise price)
100 shares at a market price of $10, and an exercise price of $9. 10 - 9= 1x 100= 100

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4
Q

How should gains or losses from fair value hedges be recognized?

A

The gain or loss, along with the offsetting loss or gain attributable to the hedged risk, should be recognized currently in earnings in the same accounting period.

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5
Q

What is the underlying?

A

The underlying the factor that is used in the formula applied to the notional amount to determine what amount will be exchanged between the parties.

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6
Q

How are gains or losses from cash flow hedges recognized?

A

Changes in the effective portion of cash flow hedges are reported in OCI

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7
Q

What condition must a non-public company follow in order to apply the simplified hedge accounting approach to a cash flow hedge?

A

The variable rate on the interest swap and the variable rate on the hedged borrowing itself must be linked to the same index, such as the federal prime rate.

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