Derivative Instruments Flashcards
A transaction dominated in a currency other than the entity’s functional currency
Foreign currency transaction–different from a foreign currency transalation
A financial instrument that derives its value as a financial instrument from something else and must meet three specific criteria to qualify as such
Derivative instrument
Derivative instruments that meet two primary criteria :
(1) sufficient documentation relating to its objective, identification, and assessment
(2) are highly effective
Hedging instruments
The viewpoint adopted by FASB in which making the sale is the result of an operating decision, while bearing the risk of fluctuation spot rates is the result of an investment decision (Therefore, the sales amount should not be altered due to fluctuating spot rates)
Two-transaction approach
The rate or price that exists outside the derivative instrument that is used to determine the value of the derivative instrument–may be any financial or physical variable that has either observable changes or objectively verifabe changes
the “underlying” (stock price)
The number of units related to teh derivative instrument
Notional amount
A hede of the exposure to changes in the fair value of either a:
1) recognized asset/liability
2) unrecognized firm commitment
Fair value hedge
A hedge to the exposure to variability in the cash flows of
1) a recognized asset/liability
2) a forecasted transaction
Cash flow hedge
A hedge of the foreign currency exposure of
1) an uncrecognized firm commitment
2) AFS security
3) forecasted transaction
4) net investment in a foreign operation
Foregin currency hedge
Calculated using the underlying and the notional amount in some combination
Settlement amount
A derivative instrument in which one party blieves the interst rate on their fixed-rate debt is going to drop and swaps interst payments with a party that believes the interest rate on their variable-rate date is going to rise
Interset rate swap
A financial contract, known as “the host contract” that has an embedded derivative contract within it that needs to be separataed from it
Hybrid instruments
The process of separating an embedded derivative instrument from its host contract so that it can be accounted for under the rulse of derivatives
Bifurcation
The primary criterion for a cash flow hedge which i established if htebasis for hte change in cash flows is the same for hedged asset/liability and the hedging instrument
Linking
The risk that a loss will occur because parties to the instrument do not perform as expected–exists when concentrations exist (i.e. a number of an entity’s financial instruments are associated with similar actviies)
Credit risk
