Derivatives : Derivatives are some financial instruments which are meant for managing risk and safeguard the risk created by other financial instruments. These financial instruments derive the values from the future value of underlying security or index. Some examples of derivatives are forward contracts, interest rate swaps, futures, and options. Hedging : This is the business deal entered into, by a company to produce exposure or coverage over the exposure caused by the existing deal. In simple terms, this is the transaction which produces gains to cover the losses produced by existing transaction. Cash flow hedge : If a company uses any derivative to cover the risk due to cash flow changes of asset, or a liability, or a commitment to buy or sell, the derivative is classified as cash flow hedge. To explain : The timing of recognition of gains and losses on cash flow hedge

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Chapter A, Problem A.7Q

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Derivatives: Derivatives are some financial instruments which are meant for managing risk and safeguard the risk created by other financial instruments. These financial instruments derive the values from the future value of underlying security or index. Some examples of derivatives are forward contracts, interest rate swaps, futures, and options.

Hedging: This is the business deal entered into, by a company to produce exposure or coverage over the exposure caused by the existing deal. In simple terms, this is the transaction which produces gains to cover the losses produced by existing transaction.

Cash flow hedge: If a company uses any derivative to cover the risk due to cash flow changes of asset, or a liability, or a commitment to buy or sell, the derivative is classified as cash flow hedge.

To explain: The timing of recognition of gains and losses on cash flow hedge

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