Derivatives and Hedging

Question 1

What are the characteristics of a derivative?

Answer 1

A derivative instrument has three characteristics:

1. There is an underlying or notional amount.
2. There is little or no initial net investment.
3. Its term requires or permits net settlement.

Hint: NUN
Notional Amounts
Underlying invements
Net Investment

Question 2

How do you treat a hedge of anticipated Transaction

Answer 2

It is treated as a FV hedge with any gain/loss in I/S.

Question 3

requires that an entity that holds or issues derivative instruments (or nonderivative instruments that are designated and qualify as hedging instruments) disclose which of the following

Answer 3

All of the listed disclosures are required under FASB ASC 815-10-50-1A:
•Its objectives for holding or issuing those instruments
•Its context needed to understand those objectives
•Its strategies for achieving those objectives

Question 4

What is the calculation of intrinsic value?

Answer 4

The intrinsic method is the excess of the market price over the exercise price.