Intermediate Accounting Derivatives, Contingencies, Business Segments, and Interim Reports参考.ppt

Simple Example of a Derivative Simple Example of a Derivative Simple Example of a Derivative Simple Example of a Derivative A derivative is a financial instrument or contract that derives its value from the movement of the price, foreign exchange rate, or interest rate on some other underlying asset. When the agreement is made, no journal entry is required, because it is merely an exchange of promises about some future action; that is, an executory contract. Simple Example of a Derivative Types of Risk Price risk is the uncertainty about the future price of an asset. Credit risk is the uncertainty that the party on the other side of the agreement will abide by the terms of the agreement. Interest rate risk is the uncertainty about future interest rates. Exchange rate risk is the uncertainty about the U.S. dollar cash flows arising when assets and liabilities are denominated in a foreign currency. Types of Derivatives A swap is an agreement to exchange payments in the future, usually a fixed payment for a variable payment, or vice versa. A forward is an agreement to exchange an item at a set date in the future at a price that is set now. Types of Derivatives A future is quite similar to a forward except that the terms of futures contracts are standardized and these contracts are traded in markets. An option is the right to buy or sell an asset at a specified price in the future. Swap Swap Swap Forwards Forwards Futures Futures Option Option Option Option Types of Hedging Activities Broadly defined, hedging is the structuring of transactions to reduce risk. A fair value hedge is a derivative that offsets, at least partially, the change in the fair value of an asset or a liability. A cash flow hedge is a derivative that offsets, at least partially, the variability in cash flows from forecasted transactions that are probable. Overview of Accounting for Derivatives and Hedging Activities Overview of Accounting for Derivatives and Hedging Activities Overview of Accounti