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This document summarizes key aspects of accounting for derivatives and hedge accounting. It defines derivatives according to IAS 39 as financial instruments that meet three criteria: their value changes in response to an underlying instrument, they require little initial investment, and are settled at a future date. Examples of common derivative types and their underlying instruments are provided. Derivatives can be used to manage risks, reduce borrowing costs, and generate profits from trading. Forward contracts are agreements between two parties to exchange an item at a fixed price on a future date, and their fair value can be estimated based on the forward price and delivery date.
This document summarizes key aspects of accounting for derivatives and hedge accounting. It defines derivatives according to IAS 39 as financial instruments that meet three criteria: their value changes in response to an underlying instrument, they require little initial investment, and are settled at a future date. Examples of common derivative types and their underlying instruments are provided. Derivatives can be used to manage risks, reduce borrowing costs, and generate profits from trading. Forward contracts are agreements between two parties to exchange an item at a fixed price on a future date, and their fair value can be estimated based on the forward price and delivery date.
This document summarizes key aspects of accounting for derivatives and hedge accounting. It defines derivatives according to IAS 39 as financial instruments that meet three criteria: their value changes in response to an underlying instrument, they require little initial investment, and are settled at a future date. Examples of common derivative types and their underlying instruments are provided. Derivatives can be used to manage risks, reduce borrowing costs, and generate profits from trading. Forward contracts are agreements between two parties to exchange an item at a fixed price on a future date, and their fair value can be estimated based on the forward price and delivery date.
Summary of Chapter 9 Accounting for Derivatives and Hedge Accounting I. Derivatives According to IAS 39, derivatives has to meet three criteria: o Its value changes in response to a change in an underlying. o Requires little or no initial net investment. o Settled at a future date. Derivative is a financial instrument within the scope of PSAK 55 Examples of derivative instruments and their underlying: Type of derivative Underlying Used by instruments Options contract (call and put) Security price Producers, trading firms, financial institutions and speculators Forward contracts Foreign exchange rates Various companies Future contracts Commodity price Producers and consumers Swaps Interest rate Financial institutions There are several uses of derivative instruments: o Manage market risks o Reduce borrowing cost o Profit from trading and speculation Types of derivatives according to their characteristics which influence their fair values: o Forward-type derivatives (forward contract and swaps) o Option-type derivatives (call & put options, caps & collars, and warrants Forms of derivatives: o Free standing derivatives o Embedded derivatives II. Forward Contracts A forward contract is an agreement between two parties (counterparties) whereby a buyer and a seller agree to exchange an item for a specified amount at a fixed price (forward price/forward rate) and delivered on a specified future date (maturity date/forward date). Forward contracts arent standardized contracts, as theyre not traded on an exchange. Thus no readily available quoted price for such contracts. Though forward contracts carry higher counterparty risks than other similar instruments. The fair value of a forward contracts can be estimated with the following:
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