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Lecture Objective
Understand
key financial
instruments
Learn how derivatives could be
used as Hedging instruments
Be familiar with the main
requirements of IFRS 9 with
regard to Hedge Accounting
Presentation Outline
INTRODUCTION
MONEY
MARKET INSTRUMENTS
CAPITAL MARKET INSTRUMENTS
FINANCIAL DERIVATIVES
HEDGE ACCOUNTING PRINCIPLES
CONCLUSIONS
INTRODUCTION
Financial Instruments can be
divided into two broad groups
namely:
Money market instruments
Capital market instruments
MONEY MARKET
INSTRUMENTS
Treasury
...Money market
Instruments
Repurchase
Capital Market
Instruments
Common
Stock/Equities/Ordinary
shares- certificates are legal
documents that evidence
ownership in a company
Preferred Stock/Shares enjoy
prior claims over the ordinary
shareholders and carry a fixed
rate of dividend.
...Capital Market
Instruments
Debentures
DERIVATIVES
Derivatives refer to a broad class of
instruments which derive their value from
the price of the underlying asset.
In the case of commodity derivatives,
underlying asset can be wheat, gold, oil etc.
For financial derivatives, it can be stock,
currency etc.
The focus of this section is on financial
derivatives
Financial Derivatives
Forward
Contract- An agreement
between two parties to buy or
sell an asset in future. The price
which is paid/received by the
parties is decided at the time of
entering into the contract.
See Illustration
...Financial Derivatives
Futures-
a standardized forward
contract to buy or sell the
underlying asset at a specified
price in the future through an
organized Exchange.
There are margin requirements to
provide safeguard.
See illustration
...Financial Derivative
Options
Contract- An option is a
right but not the obligation to buy
or sell something at a stated date
and specified price.
A call option gives one the right
to buy; a put option the right to
sell.
See Illustration
...Financial Derivatives
Swap
Contract- an agreement
between parties, called
counterparties, to exchange
streams of cash flows over a
period of time in the future
...Financial DerivativesParticipants
Hedgers-
use derivatives to
reduce the risk associated with
the price of an asset.
Speculators- bet on future
movements in the price of an
asset with a view to making
profit.
Arbitrageurs- take advantage of
a discrepancy between prices of
Hedge Accounting
IAS
...Hedge AccountingCriteria
The
...Hedge AccountingCriteria
The
...Hedged items
The
...Hedging Instrument
Most
derivative financial
instruments may be designated
as hedging instruments provided
they are with an external party.
An entitys own equity
instruments do not qualify
...Discontinuing Hedge
Accounting
Conclusions
Financial instruments are either short term
or medium to long term known as money or
capital market instruments respectively.
Financial derivatives can be used as
hedging instruments.
The basic principle of IFRS 9 is that all
derivatives are carried at fair value with
gains and losses recognized in the income
statement in the period in which they arise.
THE END