Derivatives

Question 1

What are the three characteristics of derivatives?

Answer 1

NUNS
No net investment
Underlying 
Notional amount
Settlement (net)

Question 2

What is a fair value hedge?

Answer 2

Hedge against a firm commitment, asset, or liability

Reported in earnings

Question 3

What is a cash flow hedge?

Answer 3

Hedge against fluctuation in future cash flows
Effective portion reported in OCI
Ineffective portion reported in earnings

Question 4

What is basis risk?

Answer 4

Changes in value of derivative may not match exactly changes in the value of asset