Module 19 Flashcards
What is a foreign currency transaction?
It is when an exchange takes place (often A/P or A/R that the money exchangin hands is not US Dollar
What is the ACH topic for Foreign Currency Transactions?
ACH 830
What disclosures are required for Foreign Currency Transactions
1) Aggregate transaction gain/loss that is included in net income and 2) Significant rate changes subsequent to the date of the financial statements including effects on unsettled foreigh currency transactions
How do you determine the Gain/loss on Foreign Currency Transactions?
You make T accounts and plug the gain/loss at each period change
T/F would you ever use 30 day rates on foreign currency transactions?
No, always use spot rates on foreign currency transactions
What is Fair Value?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
What is a fair value hedge?
a hedge of the exposure to changes in the fair value of a recognized asset, Or, an unrecognized firm commitment
What is a cash flow hedge?
a hedge of the exposure to variability in the cash flows of a recognized asset or liability, or, a forecasted transaction
What is a foreign currency hedge?
a hedge of the foreign currency exposure of a: unrecognized firm commitment, available for sale security, forecasted transaction, or a net investment in a foreign operation.
What are the 3 distinguishing characterictics of a derivative instrument?
Must contain 1 or more underlyings, 1 or more notional amounts, and a settlement amount.
What disclosures are required for hedging intruments
1) objectives and stragegies for achieving them, 2) Context to understand the instrument, 3)Risk management Policies, 4) A List of hedged instruments.
What is an underlying?
the financial or physical variable that has either observable changes or objectively verfiable changes.
What is the notional amounts?
the # of currency or other units specified in the financial instrument or other c conttract
What is a Hybrid instrument?
A financial instrument that has a host contract, and a derivative instrument embedded.
How do you separate a host contract and a derivative instrument?
By bifurcation.
What are the 3 criteria that are used to determine if bifurcation must occur?
1) embedded derivative must meet definition of derivative. 2) the hybrid instrument is not regularly recorded at fair value. 3) The economic charasteristics nad ricks of the embedded derivitive clearly and closely related.
What is required for a firm commitment to qualify as a hedged item?
1) Be binding on both Parties. 2) Be specific with respect to all significant terms. 3) Contain a nonperformanc clause that makes performance profitable.
What criteria must be met in order to qualify as a cash flow hedge?
The hedged asset/liability, and hedging instrument must be linked (specified rate is the same for both items).
Where do gain/losses for a cash flow hedge get reported?
The Effective portion is recorded in OCI, The ineffective portion into income from continuing operations.
Where do gain/losses for a fair value hedge get recorded?
Gains and Losses on the hedged asset/liability and the hedging instrument will be recognized in current earnings
What are the four foreign currency hedges?
Unrecognize firm commitment, available for sale securities, foreign currency denomonitated forecasting tranactions, and net investments in foreign operations
What are examples of derivative instruments?
Options to purchase (Call) or Sell (put) exchange-traded securities, futures contracts, interest rate swaps, currency swaps, swapations (an option to swap), credit indexed contracts, interest rate caps/floors/collars
The holder of a hybrid instrument normally requiring bifurcations can make an election not to bifurcate the instrument. Instead, the entire instrument is valued at fair value, what are the requirements?
1) The election is irrevocable, and made on an instrument by instrument basis
2) Changes in fair value of the hybrid instruments are recognized each year in earnings
3) If a company elects to use fair value measurement on selected hybrid instruments, the balance sheet disclosure may be presented in one of two ways; (as a sepearate items for the fair value and non-fair value instruments on the balance sheet, and (2) as an aggregate amount of all hybrid instruments with the amount of the hybrid instruments at fair value shown in parentheses
What is required in order for a derivative instrument to qualify as a hedging instrument?
1) Sufficient documentation must be provided at the beginning of the process to identify at a minimum (a) the objective and strategy of the hedge, (b) the hedging instrument and the hedged item, and (c) how the effectiveness of the hedge will be assessed on an ongoing basis,
And,
2) The hedge must be highly effective throughout its life.
What is a call option?
An American call option provides the holder the right to acquire an underlying at an exercise or strike price, anytime during the option term. A premium is paid by the holder for the right to benefit from the appreciation in the underlying
What is a firm commitment?
An agreement with an unrelated party, binding on both, usually legally enforceable, specifying all significant terms and including a disincentive for nonperformance sufficient to make performance likely?
What is a forward contract?
an agreement between two parties to buy and sell a specific quantity of a commodity, foreign currency, or financial instrument at an agreed-upon price, with delivery and/or settlement at a designated future date. Because a forward contract is not formally regulated by and organized exchange, each party to the contract is subject to the default of the other party.
What is a futures contract?
A forward-based contract to make or take delivery of a designated financial instrument, foreign currency, or commodity during a designated period, at a specified price or yield. The contract frequently ahs provisions for cash settlement. A futures contract is traded on a regulated exchange and, therefore, involves less credit risk than a forward contract?
What is ‘in the Money’?
A call option is in the money if the price of the underlying is greater than the strike or exercise price of the underlying?
What is ‘Out of the Money’?
A call option is out of the money if the strike or exercise price is greater than the price of the underlying. A Put option is out of the money if the price of the underlying is greater than the strike or exercise price.
What is a Put option?
An american put option provides the holder the right to sell the underlying at an exercise or strike price anytime during the option term. A gain accrues to the holder as the market price of the underlying falls below the strike price?
What is a Swap?
it is a forward-based contract or agreement generally between two counter-parties to exchange streams of cash flows over a specified period in the future.
