Summary-Hedges

Question 1

Characterisitics of. Derivative

Answer 1

1. Derives value from underlying asset,price, rate
2. Little to no cost/value
3. Fluctuates with underlying asset
4. Settled in cash in future

If you get the thing at the end its an own use contract.

Question 2

Accounting Treatment

Answer 2

Default-FVTPL
* Recognise at 0 initially.

Gain
* Gain is between value taken out and value at YE.
* Upon Gain (settlement)- DR Fin Asset CR PL

Loss
* L is between value taken out and value at YE.
* Upon Loss(Settlement) - CR Fin Asset DR PL

If part of Hedging relationship

Question 3

Types of Derivatives

Answer 3

1. Futures
2. Options- option
3. Swaps- agree to swap interest rates
4. Forward- fix interest or loan

Question 4

What is a hedging Instrument

Answer 4

Use to offset losses on a hedged item.

1. External to organsiation
2. May used a proportion of a derivative
3. Can use a combination of derivatives

Question 5

What is Hedge Item & Criteria

Answer 5

Financial Asset or combination of assets.

Can group if:
* Individually eligible
* Managed together
* Usually some sort of FX risk

Question 6

For a hedge to exist:

Answer 6

1.Item/Instrument must meet hedge item & hedge instrument criteria
2.Must formally designate & document the effect trying to achieve.
3.Must be effective

Question 7

What is effectiveness?:

Answer 7

1. Economic relationship - correllation between item & instrument.
2. Change in value can’t be caused by credit risk but by risk being hedged.
3. Hedged amounts should match.

Question 8

When do we discontinue a hedge?

Answer 8

1. If instrument is derecognised
2. If criteria was no longer met
3. Future cash flow no longer possible.

Discontinue prospectively

Gains/Losses in reserve take to PL if cashflow happening

or wait until cashflow to happen if still happening.

Question 9

Types of Hedging

Answer 9

1. Fair value hedge- Item & instrument recognised FVTPL and net off.

2.Cashflow Hedge- Hedging change in future cashflow. usually e/r or i/r. Change has to be highly probable otherwise discontinue.

Question 10

Cashflow hedging treatment

Answer 10

Before Cashflow @ YE:
* Record movement in price of asset - movement in price of future.
* effective portion in OCI -amt hedged.
* Overhedging to PL.

When cashflow occurs @ Settlement:
* Transfer to gain/loss on future to PL
* Net against purchase price