Derivatives test 2 questions with
complete solutions
derivative - correct answer ✔✔ a contract with all of the following characteristics:
-an underlying and either (1) a notional amt, (2) a pmt provision, or (3) both
-that requires no or relatively small initial net investment, and
-that is "net" settled at a future date
deriv may be - correct answer ✔✔ freestanding or embedded in a host contract (hybrid fin
instrument)
deriv exclusions - correct answer ✔✔ a number exist
base case: of acc for derivs - correct answer ✔✔ -deriv fin instruments quaify as assets and / or
liabs and should be reported on the BS
-deriv can only be measured at fv (measurement basis) on the bs
- changes in the fv of deriv shoulded be reported directly in income
bottom line: derivs are assets and liabs that should be reported at fv on the BS. changes in fv
should be recorded in income in period of change.
acc for deriv tracks - correct answer ✔✔ non heding activities (baseline scenario): speculating w
deriv or dont qualify for hedge accounting use baseline scenario to account for derivs
qualify and elect hedge accounting: must have entity book qualify and elect hedge accounting
, hedge accounting - correct answer ✔✔ allows a company to modify the measurement basis
(can take required mb and change it to dif mb) of either the hedged item (fin asset or liab) or
the heging instrument (deriv)
- so that gains (losses) from the hedged item and hedging instrument are reported in the same
period on the FS
-acknowledge fact that deriv can be used to hedge existing risks
-only transactions that meet the criteria for hedge accounting (set forth in the standard) are
eligible for hedge accounting modification
option a - correct answer ✔✔ no hedge accounting
non hedging acts - correct answer ✔✔ -when derivs are used for speculation, or when hedge
acc is not achieved
-recorded on bs
-measured on bs at fv
-changes in fv (from one period to the next) included in IS each period.
-record deriv at fv on bs
-include periodic changes in fv on IS each period.
-fv is what deriv is worth. notional amt is notional amt of underlying
option b - correct answer ✔✔ qualify and elect hedge accounting
economic hedging (motivation for hedging) - correct answer ✔✔ -companies use derivs to
hedge an existing risk exposure
-companies enter into hedging relationships to minimize the risks that changes in mkt prices can
have on cash flows, NI, or asset values
-economic hedging is an activity entered into to hedge an existing or probable future risk
-offset existing hedge risk by entering div contract
complete solutions
derivative - correct answer ✔✔ a contract with all of the following characteristics:
-an underlying and either (1) a notional amt, (2) a pmt provision, or (3) both
-that requires no or relatively small initial net investment, and
-that is "net" settled at a future date
deriv may be - correct answer ✔✔ freestanding or embedded in a host contract (hybrid fin
instrument)
deriv exclusions - correct answer ✔✔ a number exist
base case: of acc for derivs - correct answer ✔✔ -deriv fin instruments quaify as assets and / or
liabs and should be reported on the BS
-deriv can only be measured at fv (measurement basis) on the bs
- changes in the fv of deriv shoulded be reported directly in income
bottom line: derivs are assets and liabs that should be reported at fv on the BS. changes in fv
should be recorded in income in period of change.
acc for deriv tracks - correct answer ✔✔ non heding activities (baseline scenario): speculating w
deriv or dont qualify for hedge accounting use baseline scenario to account for derivs
qualify and elect hedge accounting: must have entity book qualify and elect hedge accounting
, hedge accounting - correct answer ✔✔ allows a company to modify the measurement basis
(can take required mb and change it to dif mb) of either the hedged item (fin asset or liab) or
the heging instrument (deriv)
- so that gains (losses) from the hedged item and hedging instrument are reported in the same
period on the FS
-acknowledge fact that deriv can be used to hedge existing risks
-only transactions that meet the criteria for hedge accounting (set forth in the standard) are
eligible for hedge accounting modification
option a - correct answer ✔✔ no hedge accounting
non hedging acts - correct answer ✔✔ -when derivs are used for speculation, or when hedge
acc is not achieved
-recorded on bs
-measured on bs at fv
-changes in fv (from one period to the next) included in IS each period.
-record deriv at fv on bs
-include periodic changes in fv on IS each period.
-fv is what deriv is worth. notional amt is notional amt of underlying
option b - correct answer ✔✔ qualify and elect hedge accounting
economic hedging (motivation for hedging) - correct answer ✔✔ -companies use derivs to
hedge an existing risk exposure
-companies enter into hedging relationships to minimize the risks that changes in mkt prices can
have on cash flows, NI, or asset values
-economic hedging is an activity entered into to hedge an existing or probable future risk
-offset existing hedge risk by entering div contract
