Financial Instruments

Card Set Information

Author:
H.leafgreen
ID:
275382
Filename:
Financial Instruments
Updated:
2014-05-27 03:15:00
Tags:
AFA
Folders:
AFA
Description:
Accounting for derivatives
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  1. Characteristics of Derivatives
    1. Value changes in response to change in specified variable

    2. Requires no initial net investment

    3. Settled at a future date (leveraged purchase)
  2. Fair Value Hedge
    "Tree"

    • Hedged risks: Changes in FV
    • Hedged Items: Recognized asset/liability or unrecognized firm commitment

    • Attributable to a particular risk
    • Could affect P or L
  3. Cash Flow Hedge
    "Fruit"

    • Hedged risks: Exposure to variability in cash flows
    • Hedged Items: Interest payment on variable rate debt or highly probable forecast transaction

    Attributable to a particular risk associated with a recognised asset/liability
  4. How to account for FV Hedge?
    Changes in FV taken to P&L
  5. How to account for Cash Flow Hedge?
    Changes in FV of hedging instrument

    • Effective: taken to equity (OCI)
    • Ineffective: taken to P&L
  6. How to account for hedge of net investment?
    Changes in FV of hedging instrument

    • Effective: taken to equity (OCI)
    • Ineffective: taken to P&L
  7. Hedge effectiveness
    Change in FV or CF of hedged item divided by Change in FV or CF of hedging instrument

    Should be 80-125% range
  8. Forward PURCHASE Contract
    • Received variable
    • Pay fixed

    Favorable: Current forward rate > contracted
  9. Forward SALES contract
    • Received Fixed
    • Pay Variable

    Unfavorable: Current forward rate> contracted

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