Advanced Accounting
14th Edition
ISBN: 9781260247824
Author: Joe Ben Hoyle, Thomas F. Schaefer, Timothy S. Doupnik
Publisher: RENT MCG
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Question
Chapter 9, Problem 16Q
To determine
The way in which the changes in the fair value of an option is reported under a
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How can derivative security be used to hedge portfolio risk?
How is the adjustment to fair value recorded differently for a cash flow hedge versus a fair value hedge? That is, how does the fair value adjustment of each type of hedge affect current period net income and the accounting equation?
How do derivatives hedge risk?
Chapter 9 Solutions
Advanced Accounting
Ch. 9 - Prob. 1QCh. 9 - Prob. 2QCh. 9 - What factors create a foreign exchange gain on a...Ch. 9 - In what way is the accounting for a foreign...Ch. 9 - Prob. 5QCh. 9 - How does a foreign currency option differ from a...Ch. 9 - Prob. 7QCh. 9 - Why would a company prefer a foreign currency...Ch. 9 - How do companies report foreign currency...Ch. 9 - How does a company determine the fair value of a...
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- Explain the Use of Derivatives to Hedge Portfolio Risk?arrow_forwardExplain what a “riskless hedge” is and how the riskless hedge concept is used in theBlack–Scholes OPM.arrow_forwardDerivative instruments acquired to hedge exposure may be classified as either a fair value hedge or a cash flow hedge. Discuss these two types of hedges and provide numerical examples for each.arrow_forward
- How do forwards, futures, and swaps hedge risk?arrow_forwardWhat does vega measure? What can you tell from vega value? Can the vega of a derivatives portfolio be changed by taking a position in the underlying asset? Explain your answer.arrow_forwardImmunization is intended to protect a portfolio against interest rate risk. What should be done? How does it work?arrow_forward
- A hedger locks in a price with the final outcome of that hedge determined by the final basis. A. True B. Falsearrow_forwardWhat is the effect of interest rate volatility on callable options and puttable options?arrow_forwardForwards and Futures: How are forwards and futures similar? How are they different? Briefly explain Advantages/Risks: What are the advantages and risks associated with these derivative instruments?arrow_forward
- How are derivatives valued on the balance sheet? How is the adjustment to fair value recorded differently for a cash flow hedge versus a fair value hedge? That is, how does the fair value adjustment of each type of hedge affect current period net income and the accounting equation? What are the three criteria that must be met for a derivative to be classified as a hedge? Once entities decide to buy or sell derivatives to hedge economic risks, they then need to decide whether they want to use hedge accounting; it is an election, not a requirement, even when the derivatives are for the economic purpose of hedging. This election is reminiscent of inventory accounting. Just like when a company selects an inventory method, a company is not required to select the accounting method (LIFO, FIFO, weighted average, specific unit) that most closely corresponds with the physical movement of inventory, although they are free to do so. If entities decide to elect hedge accounting, the following…arrow_forwardWhat is the relation between the expected rate of return and the required rate of return as they pertain to the fair market price and the current market price of a security?arrow_forwardShould gains and losses on a fair value hedge be recorded as they occur, or should they be recorded to coincidewith losses and gains on the item being hedged?arrow_forward
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