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Accounting For Derivatives and Hedging Transactions: Derivative

The document discusses accounting for derivatives and hedging transactions. It defines derivatives as instruments whose value is derived from an underlying asset and requires little to no initial investment. Common types of derivatives include forwards, futures, options, and swaps. Derivatives should be disclosed initially based on their notional amount, even if they have no value at inception.

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Aureen Tabamo
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318 views2 pages

Accounting For Derivatives and Hedging Transactions: Derivative

The document discusses accounting for derivatives and hedging transactions. It defines derivatives as instruments whose value is derived from an underlying asset and requires little to no initial investment. Common types of derivatives include forwards, futures, options, and swaps. Derivatives should be disclosed initially based on their notional amount, even if they have no value at inception.

Uploaded by

Aureen Tabamo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Accounting for derivatives and

Hedging transactions
Derivative
Does not have a value of its own. It derives its value from the changes in value of
some other underlying asset or other instrument. Derivatives should be disclosed.

Characteristics:
 Its value changes in response to the change in an underlying.

 It requires no initial net investment or a very minimal initial net investment; it


is an executory contract.

 It is settled at a future date

Underlying event that will trigger the change in the derivative... On initial date a
derivative usually have no amount and does not require cost, it is not recorded.
However, on initial date after the transaction, you can get the notional amount
(specified unit of measure of an underlying)

🗯 Market price of shares + notional amount = derivative amount

For example:

Common types of derivatives


 Forward contract - an agreement between two parties to exchange a
specified amount of a commodity, security. This is more personal, or private

Accounting for derivatives and Hedging transactions 1


and most likely to be OTC or over the counter transactions. Two parties
interact directly with each other.

 Future contract - traded in a market; usually transacts with the broker

 Option - is a contract giving the holder the right, but not the obligation, to
buy or sell at a specified price anytime during a specified period in the future.

Two types of option as to right of holder:

Call option (callable) - an option to buy

Put option (puttable) - an option to sell

→ At the money - holder may or may not exercise option; no gain or loss
→ In the money - holder should exercise; gain in exercising
→ out of the money - holder should not exercise; loss in exercising

 Swap - contract in which 2 parties agree to exchange payments in the future


based on the movement of some agreed -upon price olr rate

Interest rate swap - contract between two parties who agree to exchange
future interest payments on a given loan amount.

Foreign currency swap - contract between two parties who agree to


exchange sum of money in one currency to another currency.

Accounting for derivatives and Hedging transactions 2

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