FAR 6.3 - Derivatives & Hedge Accounting Flashcards
Financial instrument that derives its value from the value of some other instrument and has all three of the following characteristics:
One or more underlying and notional amounts
No initial net investment is required
Can be settled for cash or by delivery of an asset
Derivative instrument
A specified price, rate, or other variable that may or may not occur. What we are gambling on that may change in value
Underlying
A specified unit of measure
Notional amount
Amount determined b the multiplication of the notional amount and the underlying
Value or settlement amount
Determinable settlement what is to be made if the underlying behaves in a specified way
Payment provision
The use of a derivative to offset anticipated losses
Hedging
Gives the holder the right to buy from the option writer at a specified price during aa specified period of time:
Call option
Gives the holder the right to sell to the option writer at a specified price during aa specified period of time:
Put option
An agreement between two parties to exchange a commodity, currency, or other asset at a specified price on a specified future date:
Futures contract
One party talks a long position meaning:
It agrees to buy a particular item
One party takes a short position meaning :
It agrees to sell a particular item
A publicly traded contract and therefore more liquid:
Futures contract
Private, over-the-counter contracts therefore less liquid:
Forwards or swap contracts
Similar to future contract except they are privately negotiated and do not have a standardized notional amounts or settlement dates
Forward contracts
Aa private agreement between two parties that is equivalent to a series of forward contracts:
Swap contract