16-Complex - Chapter 16 Chapter 16 Complex Financial...

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Unformatted text preview: Chapter 16 Chapter 16 Complex Financial Instruments Complex Financial Instruments Note: Financial calculator required Only TI BA II Plus supported in class 2 Complex Financial Instruments Complex Financial Instruments Derivatives Understanding derivatives: managing risk Recognition and measurement Derivatives involving the entitys own shares Share-Based Compensation Types of plans Special issues Disclosure of compensation plans Debt versus Equity Issuer Perspective Understanding the economics of complex financial instruments Presentation Measurement Interest, dividends, gains, and losses IFRS and Private Enterprise GAAP Comparison Comparison of IFRS and private enterprise GAAP Looking ahead 3 Financial Instruments Financial Instruments Financial instruments : contracts that create both a financial asset for one party and a financial liability or equity instrument for the other party Financial instruments can be primary or derivative 4 Financial Instruments Financial Instruments Financial instruments can be primary or derivative Primary financial instruments : include most basic financial assets and financial liabilities, such as receivables and payables, and equity instruments, such as shares. I O U $ 5 N e x t T h u r s d a y I O U $ 5 N e x t T h u r s d a y How much would you pay for this contract? 5 Derivative Instruments Derivative Instruments Derivatives are financial instruments that create rights and obligations , that transfer financial risk from one party to the another party Derivatives have the following characteristics: 1. Their value changes in response to the underlying instrument (the underlying) 2. They require little or no initial investment 3. They are settled at a future date 6 Derivative Instruments Derivative Instruments I O U $ 5 I f i t r a i n s o n S a t u r d a y I O U $ 5 I f i t r a i n s o n S a t u r d a y I w i l l p u t 2 5 L o f g a s i n y o u r c a r o n A u g u s t 2 f o r $ 1 . 7 5 a l i t e r I w i l l p u t 2 5 L o f g a s i n y o u r c a r o n A u g u s t 2 f o r $ 1 . 7 5 a l i t e r How much would you pay for these contracts? 7 Derivatives Derivatives Derivatives are financial contracts Enable risk transfer between counterparties Contracts value is derived from value of something else Typically design to address specific risk May or may not be traded 8 Derivatives Derivatives Derivative instruments include: 1. Forwards 2. Futures 3. Options Example: Stock Options The stock is the underlying If the share price goes up, the option is worth more; If the share price goes down, the option may become worthless 9 Derivatives - Examples Derivatives - Examples...
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This note was uploaded on 10/26/2011 for the course ACCT 3410 taught by Professor Jobs during the Spring '11 term at Kwantlen Polytechnic University.

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16-Complex - Chapter 16 Chapter 16 Complex Financial...

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