Derivatives

Question 1

FV hedge → fixed CF
CF hedge → unguaranteed CF

FV or CF
- recognized asset or liability

Answer 1

both

Question 2

FV hedge → fixed CF
CF hedge → unguaranteed CF

FV or CF
- firm commitment

Answer 2

both

Question 3

FV hedge → fixed CF
CF hedge → unguaranteed CF

FV or CF
- highly probable forecasted transaction

Answer 3

CF hedge

Question 4

FV hedge → fixed CF
CF hedge → unguaranteed CF

FV or CF
- net investment in foreign operation

Answer 4

CF hedge

Question 5

FV hedge → fixed CF
CF hedge → unguaranteed CF

FV or CF
- swap → Fixed to Variable

Answer 5

FV hedge

Question 6

FV hedge → fixed CF
CF hedge → unguaranteed CF

FV or CF
- swap → variable to fixed

Answer 6

CF hedge

Question 7

What is the difference between forward contract and futures contract?

Answer 7

Forward → private transaction
Futures → traded in an exchange

Option → has a right only, not obligation

Question 8

Where to record the G/L (FV hedge vs CF hedge)
- hedged item

Answer 8

FV hedge
- P/L

CF hedge
- normal procedure

Question 9

Where to record the G/L (FV hedge vs CF hedge)
- hedging instrument

Answer 9

FV hedge
- P/L

CF hedge
- OCI

Question 10

Recognized Asset or Liability
- what rate to use in item? in instrument?

Answer 10

Item → Spot
Instrument → Forward

Question 11

Firm Commitment
- what rate to use in item? in instrument?

Answer 11

Item → Forward
Instrument → Forward

Question 12

What is the entry in transaction date
- if I have payable

Recognized Asset or Liability

Answer 12

Item
- Dr. Purchases // Cr. Payable

Instrument
- Dr. FC Receivable // Cr. Peso Payable (locked)

Question 13

What is the entry in transaction date
- if I have payable

Firm Commitment

Answer 13

Item
- no entry

Instrument
- Dr. FC Receivable // Cr. Peso Payable (locked)

Question 14

What is the entry in settlement date
- if I have payable

Firm Commitment

Answer 14

Item
- Dr. PPE // Cr. Cash (FC)

Instrument
- Dr. Peso Payable (close) // Cr. Cash (peso)
- Dr. Cash (FC) // Cr. FC Receivable (close)

Firm Commitment → closed to PPE or P/L

Question 15

Remember in Firm Commitment
- perfect hedge → no gain or loss (!!!)

Answer 15

Yes

Question 16

I will purchase. What do you call the option?

Answer 16

Call Option
- Callboy

Question 17

Option
- Fair Value = Intrinsic Value + Time Value

How to solve intrinsic value?
How to solve time value?

Answer 17

INTRINSIC VALUE
- difference of market price and strike price
- only if IN the money

TIME VALUE
- residual

Question 18

Intrinsic Value → Effective Portion
Time Value → Ineffective Portion

Where to record the G/L (FV hedge vs CF hedge)

Answer 18

FV hedge
- Effective → P/L
- Ineffective → P/L

CF hedge
- Effective → OCI
- Ineffective → P/L

Question 19

Table for Shortcut in solving FX G/L

NOTE : This shortcut is only for instrument → solve separately for G/L of item

Answer 19

Receivable
Less : Payable
= Derivative (FV)
Less : Previous Value
= Gain / Loss

Buyer → Receivable (FC), Payable (Peso - locked)
Seller → Receivable (Peso - locked), Payable (FC)