XADVAC3-notes-in-Chapter-20 - XADVAC3 SUMMARY NOTES TO...

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XADVAC3 SUMMARY NOTES TO HEDGE A FOREIGN RISK PAS 39 “Derivatives”: Derives changes of values in response to a change in underlying o Examples of underlying: Interest rate Security price Commodity price Foreign exchange rate Index Credit ratings and credit index Requires little or no initial net invest o Two Broad Categories of Derivatives Forward based derivatives(no initial investment) – Forwards, Futures, Swaps Option based derivatives(little investment) – Options, Interest Rate Swaps, Interest Rate Floors It is settled at a future date – there is no risk involved if it is settled currently “NOTIONAL AMOUNT” – total face amount of the asset/liability that underlies the derivative HEDGING VS HEDGE ACCOUNTING - broad term “minimizing risk” - offsetting effects on net profit or loss of changes in fair Value of Hedging Instrument and Hedge Item - process of minimizing risk 2 Concepts of Hedge Accounting
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