Derivatives HW

Derivatives HW - DQ-2DQ-3A firm commitment to sell...

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Unformatted text preview: DQ-2DQ-3A firm commitment to sell inventory is fixed in terms of the quantity, price, and delivery terms. If thexecution of the commitment, the commitment may become more or less valuable than anticipatebecome less valuable if the price increases prior to execution of the commitment. This exposure thedged against through the use of a derivative instrument such as a contract or option to buy invehedge, the loss in value on the firm commitment should be offset by the gains in value on the derA cash flow hedge of a forecasted transaction affects both current and future operating income. Tincome is represented by the change in time value of the hedging instrument. This is measured atime less the change in intrinsic value over time. For example, if an option's total value increases increases $700, then the time value has decreased by $200. This change would be recognized inincreases $700, then the time value has decreased by $200....
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Derivatives HW - DQ-2DQ-3A firm commitment to sell...

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