Financial Instruments & Derivatives

Question 1

What is a financial instrument?

Answer 1

COD - Cash, Ownership interests in an entity (like stock), Derivative contracts that create a right and obligation to transfer other financial instruments (like stock options)

Question 2

Derivative cash flow hedge

Answer 2

To hedge against an anticipated future transaction (we do not currently own the asset); G/L will go to comprehensive income (“DENT”)

Question 3

Fair Value Hedge

Answer 3

to hedge against an asset that exists/you own; G/L goes to income statement

Question 4

What is a derivative?

Answer 4

NUnS -
No net investment
Underlying [price] and N[umber of shares]otional amount
net Settlemet

Question 5

Intrinsic Value

Answer 5

market price - strike price