Definitionen Flashcards
What is a Financial instrument?
IAS32_11 durch Verweis von #IFRS9_A und #IAS39_8
- contract that gives a financial asset of one entity and a financial liability or an equity instrument of another entity
What is a financial Liability?
Var.1
#IAS32_11 durch Verweis von #IFRS9_A und #IAS39_8
- contractual obligations to deliver cash or another financial Asset; Contractual obligations to exchange financial assets under conditions that are potentially unfavourable
Var.2
- Contract that will or may be settled in the entity’s own equity instruments and is defined as
- financial liability if
- the issuer has contractual obligations to deliver a variable number of its own equity instruments
- derivative if
- there is no exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments
What is a financial Asset?
IAS32_11 durch Verweis von #IFRS9_A und #IAS39_8
- cash; contractual rights to cash (e.g. loan) in potentially favourable conditions, contractual rights to exchange cash (Swaps), Equity instruments of another entity
What are equity Instruments?
IAS32_11 durch Verweis von #IFRS9_A und #IAS39_8
contract that evidences residual interest in assets of entity after deducting all of its liabilities
- Equity
- Residual interest in the assets of the entity after deducting all its liabilities ( #IAS_32_11, #F_49c)
- If there is no debt (and both conditions #IAS32_16a and #IAS32_16b are met)
- Important assessment practicalities
- Test of repayment obligation of the instrument or early termination rights for investor or issuer
- Test of ongoing payments
- Different results possible split accounting
What is a financial derivative?
IFRS9_A
- Value marked to changes in specific underlying
- interest rate, financial instrument, commodity, FX, indices, credit rates etc.
- Settlement at future date
- Insignificant / substantially reduced inital net investment compared with underlying
What are some examples for financial instruments?
- stocks
- exchange-traded funds (ETFs)
- bonds
- derivatives contracts (such as options, futures, and swaps)
- checks
- certificates of deposit (CDs)
- bank deposits
- loans
What are example for equity instruments?
- Common and preferred stock
- ETF
- Equity Options
- Equity Swaps
What three typical derivatives categories are there?
- Termingeschäfte -> Futures(standardvertrag)/Forwards(indiv.Vertrag)
- Option -> europäisch(Fixpunkt)/amerikanisch(Laufzeit)
- Swap
What are examples for Swaps?
Interest rate swap: forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount.
Example
PepsiCo needs to raise $75 million to acquire a competitor. In the United States, they may be able to borrow the money with a 3.5% interest rate, but outside of the U.S., they may be able to borrow at just 3.2%. The catch is that they would need to issue the bond in a foreign currency, which is subject to fluctuation based on the home country’s interest rates.
PepsiCo could enter into an interest rate swap for the duration of the bond. Under the terms of the agreement, PepsiCo would pay the counterparty a 3.2% interest rate over the life of the bond. The company would then swap $75 million for the agreed-upon exchange rate when the bond matures and avoid any exposure to exchange-rate fluctuations.
What is an example for a Call Option derivative?
Call Option Example
A potential homeowner sees a new development going up. That person may want the right to purchase a home in the future but will only want to exercise that right after certain developments around the area are built.
The potential homebuyer would benefit from the option of buying or not. Imagine they can buy a call option from the developer to buy the home at say $400,000 at any point in the next three years. Well, they can—you know it as a non-refundable deposit. Naturally, the developer wouldn’t grant such an option for free. The potential homebuyer needs to contribute a down payment to lock in that right.
With respect to an option, this cost is known as the premium. It is the price of the option contract. In our home example, the deposit might be $20,000 that the buyer pays the developer. Let’s say two years have passed, and now the developments are built and zoning has been approved. The homebuyer exercises the option and buys the home for $400,000 because that is the contract purchased.
The market value of that home may have doubled to $800,000. But because the down payment locked in a predetermined price, the buyer pays $400,000. Now, in an alternate scenario, say the zoning approval doesn’t come through until year four. This is one year past the expiration of this option. Now the homebuyer must pay the market price because the contract has expired. In either case, the developer keeps the original $20,000 collected.
What is an example for a put option derivative?
If an investor wants insurance on their S&P 500 index portfolio, they can purchase put options. An investor may fear that a bear market is near and may be unwilling to lose more than 10% of their long position in the S&P 500 index. If the S&P 500 is currently trading at $2,500, they can purchase a put option giving them the right to sell the index at $2,250, for example, at any point in the next two years.
If in six months the market crashes by 20% (500 points on the index), they have made 250 points by being able to sell the index at $2,250 when it is trading at $2,000—a combined loss of just 10%. In fact, even if the market drops to zero, the loss would only be 10% if this put option is held. Again, purchasing the option will carry a cost (the premium), and if the market doesn’t drop during that period, the maximum loss on the option is just the premium spent.
What is a financial guarantee contract?
IFRS9_A
- Contract
- issuer to make specific payments to reimburse holder
- for incurred loss
- bc. debtor defaults
What are Irrevocable Loan Commitments and how are they regulated?
- IFRS includes only if:
- designated as Financial liabilities at FVtPL #IFRS9_2_3a
- politisch, praktisch irrelevant
- settled net in cash or issuing another financial instrument #IFRS9_2_3b
- interest rate below market rate #IFRS9_3_2_c
- past practise of selling assets shortly after origination #IFRS9_3_2a
- Zweckgesellschaft die Kreditfolio aufkauft: Geht an Börse und emittiert WP
- Transfer Kreditrisiko und Ausfallrisiko
- Zweckgesellschaft die Kreditfolio aufkauft: Geht an Börse und emittiert WP
- designated as Financial liabilities at FVtPL #IFRS9_2_3a
- Fair Value influencing profit and loss
- Other loan commitments
- IAS38 –> #IFRS9_2_1g
- usually no “onerous contract”
What are financial Guarantees and how are they regulated?
IFRS9_A
- Contract
- issuer to make specific payments to reimburse holder
- for incurred loss
- bc. debtor defaults
- check contract itself –> is payment bc. of default only or also bc of other changes
- Valuation:
- Initial: FV minus premium of guarantee
- subsequently higher of
- initially recognized amount
- impairment
- difference to Credit Derivative
- payments of derivatives do not require holder to be exposed to/to actually have losses due to debtor default
- example: credit default swap
What is hedging?
- Offsetting an open position at risk by entering into an equal and opposite position
