Business Risks:
1. Price 3. Interest
2. Credit 4. Foreign Exchange
Characteristics of Derivatives:
1. Value changes in response to the value of the underlying
2. Requires no/small net investment
3. Settled at a future date
Hedge Item - the transaction that gives rise to risks.
Hedge Instrument - the contract entered into in order to mitigate or eliminate risks.
Hedge Items:
1. Exposed Asset
2. Exposed Liabilities
3. Firm Commitment/Non-cancellable
4. Forecasted Transactions (Silent = Cash Flow Hedge)
Hedge Instruments:
1. Forward/Future Contracts
2. Interest Rate Swap Agreement
3. Call Options/Put Options
Hedging Activities:
1. Cash Flow Hedge = Unrealized Gain/Loss
a. Effective = OCI to P/L
b. Ineffective = P/L
2. Undesignated/Speculation = Unrealized G/L to Effective/Ineffective to P/L
1. Price 3. Interest
2. Credit 4. Foreign Exchange
Characteristics of Derivatives:
1. Value changes in response to the value of the underlying
2. Requires no/small net investment
3. Settled at a future date
Hedge Item - the transaction that gives rise to risks.
Hedge Instrument - the contract entered into in order to mitigate or eliminate risks.
Hedge Items:
1. Exposed Asset
2. Exposed Liabilities
3. Firm Commitment/Non-cancellable
4. Forecasted Transactions (Silent = Cash Flow Hedge)
Hedge Instruments:
1. Forward/Future Contracts
2. Interest Rate Swap Agreement
3. Call Options/Put Options
Hedging Activities:
1. Cash Flow Hedge = Unrealized Gain/Loss
a. Effective = OCI to P/L
b. Ineffective = P/L
2. Undesignated/Speculation = Unrealized G/L to Effective/Ineffective to P/L
