Financial Instruments Flashcards
Derivative with speculative purposes
Intent is not to hedge a position but rather to make a profit
What reflects the existence of financial instruments
Contracts that result in exchange of cash(debt) & evidence of ownership like equity
Underlying
The specific price or rate used like a stock price or foreign exchange rate
Notional amount
The unit of measure like shares of stock or number for foreign currency units
Intrinsic value
The difference between the market price & the exercise price multiplied by the number or shares
2 basic kinds of risk that can be hedged
Fair value risks & cash flow risk
What can derivatives be used for
Hedging purposes and speculative purposes
Firm commitment
Occurs when a firm has a contractual obligation or right but no transaction has occured yet so no asset or liability has been recorded yet
What value can cash flow hedge be valued at
Present value of expected cash inflows or outflows
How may derivatives be used for cash flow
Derivative instrument may be used to hedge the cash flow with assets, liabilities, and forecasted transactions
Deferred gains or losses
Not required to disclose for FV hedge but required for cash flow hedge
How to qualify as hedged item
- Binding to both parties
- Be specific with respect to all significant items
- Contain a nonperformance clause that makes performance probable
