F6 - M3 - Derivatives and Hedge Accounting

Question 1

______ are financial instruments that derive their values from some other instrument and have the following characteristics: One or more underlying (a price, rate, or other variable) and one or more notional amounts (currency units, shares, pounds, etc.).
• Require little or no initial net investment.
• Terms require or permit a net settlement, or ready settlement outside the contract, or delivery of
an asset that gives substantially the same results.

Answer 1

Derivatives

Question 2

Derivatives are financial instruments that derive their values from some other instrument and have the following characteristics: (3)

Answer 2

One or more underlying (a price, rate, or other variable) and one or more notional amounts, Require little or no initial net investment.Terms require or permit a net settlement, or ready settlement outside the contract, or delivery of
an asset that gives substantially the same results.

Question 3

_________ and ______ are the inherent risks of all derivative instruments.

Answer 3

Market risk and credit risk

Question 4

All derivative instruments are reported at ________

Answer 4

fair value.

Question 5

The reporting of ___________ depends on the derivative designation (per below).

Answer 5

unrealized gains and losses

Question 6

If there is no hedging designation, any gain or loss must be reported in the __________. This is similar to the treatment of trading securities.

Answer 6

income statement.

Question 7

When hedging the fair value of an asset or liability currently in the balance sheet, the gain/loss on the asset/liability and the loss/gain on the hedge are both reported in the _________ for the current year.

Answer 7

income statement

Question 8

If hedging the variability in future cash flows pertaining to a particular risk, the effective portion of the cash flow hedge goes into _________ and is deferred until the hedge transaction affects earnings. The ineffective portion of the cash flow hedge is reported in __________

Answer 8

other comprehensive income, other comprehensive income

Question 9

Foreign currency hedges can be classified as (3)

Answer 9

fair value hedges, cash flow hedges, or hedges of a net investment in a foreign operation.