Financial Instruments & Derivatives Flashcards
fair value hedge
reported at its fair market value with unrealized gains or losses recognized in earnings in the period of change
An offsetting amount of loss or gain related to the hedged risk will be recognized in the same period.
Gains or losses on cash flow hedges are reported
in other comprehensive income until such time as the corresponding gain or loss on the hedged item is recognized in income.
derivative financial instrument is best described as
A contract that has its settlement value tied to an underlying notional amount
derivative NUNS
no net initial investment
Underlying
Notional amount
net SETTLEMENT
perfect hedge
no future gain or loss
A hedge is a financial instrument that is designed to reduce a risk and a perfect hedge is one that eliminates the risk entirely. Eliminating risk in its entirety protects an entity from losses associated with the risk but also prevents it from benefiting from gains associated with it.
ex: option contracts, such as stock index options; futures contracts, such as currency futures; and interest rate or foreign-currency swaps
underlying
is the factor that is used in the formula applied to the notional amount to determine that amount that will be exchanged between the parties.
intrinsic value of a stock option
is the market price less the strike price.
strike price = exercise price
