Derivatives & Hedge Accounting

Question 1

Underlying definition

Answer 1

A specified rate or value like an interest rate or foreign exchange rate, “price that could occur”

Question 2

Notional amount definition

Answer 2

Specified unit of measure like currency or shares

Question 3

Value or settlement amount

Answer 3

Is the notional amount multiplied by the underlying

Question 4

Swap derivative information

Answer 4

Hedging destination: cash flow hedge

Impact: Other comprehensive income (OCI)

Question 5

Futures derivative information

Answer 5

Hedging destination: if talks about FV then use fair value hedge, if not then cash flow

Impact: if FV then its impact is on earnings if cash flow then its OCI

Derived through a clearing house

Question 6

Buying call options

Answer 6

You benefit when the price goes up because you can buy it at a certain price and make money they the value goes up

Question 7

Selling call options

Answer 7

You make money they the price goes down because the buyer won’t exercise the option and since they wouldn’t exercise you only make money if there was a premium they have to pay you

Question 8

Buying put options

Answer 8

Buyer of a put option gets to sell at a fixed price so you want the market to go down so you can sell at the fixed rate

Question 9

Selling put option

Answer 9

Seller of the put option makes money if the price goes up

Question 10

Ineffective and effective portion of cash flow hedge

Answer 10

Ineffective portion is reported in income statement and the effective portion is reported in comprehensive income

Question 11

Fair Value Hedge Criteria

Answer 11

1. Formal documentation between derivative & hedged item
2. Hedge expected to be highly effective in offsetting changes in FV of hedged item - must be assessed at least every 3 months
3. Hedged item is specifically identified
4. Hedged item presents exposure to changes in FV that could affect income

Question 12

Derivative definition description

Answer 12

1. One or more underlyings & notional amounts

2. Not requiring an initial investment or a tiny shit

Question 13

Qualified derivatives may be used to hedge cash flow associated with

Answer 13

1. Asset, liability, or forecasted transaction

2. Not a firm commitment which would be a FV hedge

Question 14

Risk inherit of swap agreements

Answer 14

1. Credit risk results from risk of nonperformance by the counter party to the agreement
2. Market risk is risk of exchanging lower rate for higher one

Question 15

Forward Contract

Answer 15

Hedging destination: if talks about FV then use fair value hedge, if not then cash flow

Impact: if FV then its impact is on earnings if cash flow then its OCI

Derived privately with a intermediary