TAILIEUCHUNG - Lecture Intermediate accounting (4/e): Chapter Appendix A - Spiceland, Sepe, Tomassini

Appendix A: Derivatives. Derivatives are financial instruments that “derive” their values from some other security or index. They serve as a form of ‘insurance” against risk. Financial futures, forward contracts, options, and interest rate swaps are the most frequently used derivatives. | Derivatives Appendix A Appendix A: Derivatives Derivatives Derivatives are financial instruments that “derive” their values from some other security or index. They serve as a form of ‘insurance” against risk. Financial Futures Forward Contracts Options Interest Rate Swaps Derivatives are financial instruments that “derive” their values from some other security or index. They serve as a form of ‘insurance” against risk. Financial futures, forward contracts, options, and interest rate swaps are the most frequently used derivatives. Derivatives Used to Hedge Hedging means taking a risk position that is opposite to an actual position that is exposed to risk. Assume a company has a large amount of outstanding debt that has a floating (variable) interest rate. If interest rates increase, this could pose a substantial cost to the company in the form of increased interest payments. The company might choose to hedge its position by entering into a transaction that would produce a gain of roughly the same amount as the potential loss if interest rates do, in fact, increase. Part I Hedging means taking a risk position that is opposite to an actual position that is exposed to risk. For instance, the volatility of interest rates creates exposure to interest-rate risk for companies that issue debt—which, of course, includes most companies. Assume a company has a large amount of outstanding debt that has a floating (variable) interest rate. If interest rates increase, this could pose a substantial cost to the company in the form of increased interest payments. Part II The company might choose to hedge its position by entering into a transaction that would produce a gain of roughly the same amount as the potential loss if interest rates do, in fact, increase. Hedging is used to deal with three areas of risk exposure: fair value risk, cash flow risk, and foreign currency risk. We will review each of these risks in the next few slides. Financial Futures A futures contract allows a .

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• Intermediate accounting
• Lecture Intermediate accounting
• Financial accounting
• Financial futures
• Foreign currency futures
• Cash flow hedge
• Accounting process
• Accounting equation
• Accounting processing cycle
• Stock issuance
• Estimating reserves
• Liquidating dividends
• Accounting changes
• Error corrections
• Accounting choices
• Theoretical structure
• Accrual accounting
• Financial accounting environment
• Accounting for leases
• Leasing environment
• Accounting by lessee
• Special accounting problems
• Cash versus accrual accounting
• International standard setting
• Accounting standards
• Accounting assists
• The challenges facing accounting
• Income taxes
• Accounting for income taxes
• Deferred tax liabilities
• Error analysis
• Accounting policy
• Accounting estimate
• Accounting policies
• Financial reporting
• Accounting information system
• Measurement issues
• Characteristics of accounting
• Capital allocation process