# Accounting Essay

5566 Words Oct 20th, 2014 23 Pages
Chapter 10 Accounting for Derivatives and Hedge Accounting IFRS 9 defines a derivative as a financial instrument or other contract within the scope of IFRS 9 that meets three criteria: 1. Its value changes in response to a change in an "underlying". The underlying can be the price of a commodity, such as soybeans, or a financial instrument, such as a fixed rate bond. It can also be a rate such as a foreign exchange rate or a specified interest rate, for example, the London Interbank Offer Rate; It requires little or no initial net investment; and It is settled at a future date.

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Chapter 10

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TABLE 10.1 Examples of derivative instruments and their underlying Type of derivative instruments
Current forward rate is the forward rate for the remaining period to maturity (also known as the “market forward rate”). r = discount rate t = period to maturity
Chapter
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Illustration 10.1 Fair value of a forward contract On 1 March 20x5, Company A entered into a forward contract with a foreign exchange dealer to buy one million foreign currency (FC) units (FC 1,000,000) for delivery on 30 May 20x5. The following exchange rates are given: Date 1 March 20x5 31 March 20x5 30 April 20x5 30 May 20x5 Spot rate \$/FC \$1.185 1.19 1.20 1.215 30 May forward rate \$/FC \$1.20 1.21 1.205 1.215 annum) discount rate. The changes in the fair Discount factor (d) \$0 1.00835 1.004167 1.0 Fair value of forward contract [(b-a) x c]/d \$0 9,917 4,979 15,000

The fair value of the forward contract is calculated using a 5% (per value of the forward purchase contract are as follows: Contracted Current forward rate forward rate Notional (a) (b) amount Date FC 1= FC 1 = (c) 1 March 20x5 \$1.20 \$1.20 \$1,000,000 31 March 20x5 1.20 1.21 1,000,000 30 April 20x5 1.20 1.205 1,000,000 30 May 20x5 1.20 1.215 1,000,000 The following points should be noted:
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Change in fair value \$0 9,917 (4,938) 10,021

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