Mod 19 Derivative Key Terms Flashcards Preview

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Flashcards in Mod 19 Derivative Key Terms Deck (49):
0

At the money

Option where the price of underlying is equal to strike or exercise
Price

1

Bifurcation

Process of separating embedded derivative from its host
Contract

2

Purpose of bifurcation

Separate financial instruments into different components to
Account and valuate appropriately

3

Derivative instruments are financial instruments or other contracts that have...3 (characteristics)

1 one or more underlyings and notational amounts
2 no initial net investment or smaller net investment than required
Contracts expected to have similar market responses

3 terms that require or permit net settlement

4

Derivative instruments: terms that require or permit...3

1 net settlement

2 net settlement by outside contract

3 delivery of asset that results in position substantially the same
As net settlement

5

Discount or premium on a forward contract

Foreign currency amount of contract

multiplied by the difference Between the contracted forward rate
and spot rate at date of inception of contract

6

Embedded derivative

Feature on financial instrument or contract,

if stood alone would meet definition of derivative

7

Firm commitment

Agreement with unrelated party, binding both using legally
enforceable, specifying all terms

Includes disincentive for nonperformance, making performance
Likely

8

Financial instruments include...

Cash, A/R, A/P, bonds, common stock, preferred stock,
Stock options, foreign currency forward contracts, futures
Contracts

9

Forecasted transaction

Transaction expected to occur where there is no firm commitment

Gives entity no present rights or obligations

10

Forecasted transactions can be...

Hedged (special hedge accounting can be applied)

11

3 ways foreign currency transactions arise

1 buy and sell credit goods/services in foreign currency
2 borrow or lend in foreign currency
3 party to unperformed forward exchange contract

12

Forward contract, an agreement between 2 parties to...

Buy and sell specific commodity, foreign currency, or financial
Instrument at agreed upon price

With delivery and settlement at designated future

13

A forward contract is...

2) what does this mean?

Not formally regulated by an organized exchange

2) each party to contract is subject to default of other party

14

Forward exchange contract

Agreement to exchange at specified future date currencies of
Different countries at specified rate

15

Forward rate

Specified rate

16

Futures contract

Forward based contract to make or take delivery of designated
Financial instrument, foreign currency or commodity

During designated period at specified price or yield

17

Futures contract frequently has provisions for...

Cash settlement

18

Futures contract is traded on...

2) what does this mean?

A regulated exchange

2) involves less credit risk than forward contract

19

Call option is In the money if...

The price of the underlying is greater than the strike or exercise
Price of the underlying

20

Derivative instrument is one where the initial net investment is...

Zero or less than the notational amount

21

Derivative instruments allow the opportunity to take part in...

The rate or price change without owning the asset or liability

22

If an amount approximating the notational amount must be invested or received it is...

Not a derivative investment

23

2 basic forms of derivatives instruments

1 futures contracts

2 options

24

The futures contract involves, what as far as initial net investment?

Little or no initial net investment

25

Settlement on futures is usually near...

Delivery date

26

Call options when purchased require a...

Premium payment that is less than cost of purchasing equivalent
Number of shares

27

Intrinsic value, with regard to call (put) options

Larger of zero or spread between the stock (exercise) price
And exercise (stock) price

28

LIBOR, what does it stand for, define.

London Interbank Offer Rate

Widely used measure of average interest rates at point in time

29

Net settlements, to qualify as a derivative instrument 1 of the following criteria must be met:

No delivery of an asset equal to...

Notational amount is required

Ex. Interest rate swap does not involve delivery of instrument in
Which notational amount is expressed

30

Net settlements, to qualify as a derivative instrument 1 of the following criteria must be met:

Delivery of an asset equal to the notational amount is required of one of the parties but...

An exchange facilitates net settlement

Ex. Other market mechanism, institutional arrangement or side agreement facilitates net settlement

31

Net settlements, to qualify as a derivative instrument 1 of the following criteria must be met:

Delivery by one of the parties of an asset equal to the notational amount is required but the asset is either readily convertible to cash (as with contract for the delivery of a marketable security) or is...

Required but that asset is itself a derivative instrument

Ex. Swaptions

32

Swaptions

Option to swap

33

Contract terms based on changes in price or rate of the notational amount, that implicitly or explicitly require or permit...

Net settlement to qualify

34

Determining if delivery of a financial asset or liability equal to notational amount is a derivative instrument may depend on...

Whether it is readily convertible to cash

35

Notational amount

Number of units

Ex. Shares stock, principal amount, face value, stated value,
Basis points, barrels of oil

36

Out of the money,

call option is out of the money if...

The strike price or exercise price is greater than the price of the
Underlying

37

A put option is out of the money if...

The price of the underlying is greater than the strike or exercise
Price

38

Put option

Provides holder the right to sell underlying at an exercise or
Strike price anytime during the option term

Gain accrues to holder as market price of underlying falls below
Strike price

39

Swap

Forward based contract or agreement between 2 counterparties
To exchange streams of cashflows

over specified period in future

40

A swaption is an option on a swap that provides the holder with the right to enter into...

A swap at specified future date at specified terms (freestanding
Option on swap)

Or extend or terminate life of existing swap (embedded option
on swap)

41

Swaption are derivatives that have characteristics of...2

An option and interest rate swap

42

Time value

Difference between an option's price and its intrinsic value

43

Transaction gains or losses result from...

A change in exchange rates between functional currency and
Foreign currency

44

Transaction gain or loss (foreign currency transactions) represent 2 things

1 actual functional currency cash flows realized upon settlement
Of foreign currency transactions

2 expected functional cash flows on unsettle era foreign currency
Transactions

45

Underlyings

Commonly specified price or rate (stock price, interest rate,
Currency rate, commodity price, related index)

Anything with changes qualifies unless specifically excluded in
ASC 815

46

Credit risk

Risk of accounting loss from financial instrument due to Possible
failure of another party to perform according to terms of contract

47

Off balance sheet risk

Possible amount of loss from instrument that's not reflected
On balance sheet

48

Market risk

Risk that future changes in market prices may make financial
Instrument less valuable