Derivative contracts

Question 1

what are the different type of derivative contacts you can have

Answer 1

1. Call option - this is effectively the position where you have the right to buy something at a pre-agreed price
2. Put Option - This is where you have the right to offer something out as a pre-agreed price
3. Future option - this is where the future value of something is pre-agreed, usually arises on foreign transactions so that the exchange rate i.e. the amount to be paid in the home currency is agreed upon
4. Contract of difference - this is the event where you effectively will agree a rate or a price of something, usually being interest rates, and in the event that the rate differs from the pre agreed value - either party will compensate the other
5. Hedging - similar to future options, it arises secures the value of something at a future date, however with hedging it is usually over the price of goods

Question 2

In terms of derivative and hedging contracts, what part of the financial accounts would you expect to see them in

Answer 2

So this would be sitting in the Statement of Other Comprehensive Income (SOCI) or (OCI) - as it is effectively relating to future potential income

Question 3

What do we need to consider if we have been told that we have hedged a loan in respect of a shareholding in a sub

Answer 3

1. The first thing we want to note is that the potential foreign exchange losses and gains that arise on a loan are never taxed for the purposes of UK corporation tax rules
2. The amount which is deemed to be hedged on the loan is the value of the investment in that sub, but an election can be made to increase the value of which this hedge has been made against to the underlying asset value
3. Regulation 10 provides guidance on how this gain or loss is brought into the accounts upon the disposing of the loan - but we need to be mindful that in the event that SSE applies - this will also not be taxable