In option trading there are different terms involved and different complexities are involved in choosing the best fit or strategy. Each term has its own advantages and limitations.Some of the aspects to look at are the current market position, investor risk appetite, investor trading experience, profit potential, trade breakeven point, investor intentions and expectations etc.Long putThis involves buying a put option which means choice to sell option at predetermined date at expiry time. This strategy gives buyers a put option on expiry but not obligation. Premium is paid to buy put options.In this strategy the investor will exercise his option ... Read More

In trading investors can take long positions and short positions, they can buy an asset or sell an asset. Long and short positions are further complicated into call and put. An investor can take any of the above positions, meaning they may enter in long put, long call, short put or short call.In terms of hedging strategies or complex trading an investor can combine any positions. In simple terms, a long position means buying a securities/stock/currency/commodity with expectation to make profit in future. Similarly, a short position means investors can sell their securities/commodity with intention to buy again at a ... Read More

Future contract is the contract that allows the buyer/seller to buy/sell a particular commodity at a strike price at a future date. Stock futures enable investors to buy a certain quantity of stocks at strike price on a future date. Stock futures contracts were introduced in 2000 which were index based.Traders in future index are divided into two types as follows−People interested in hedging against share price movementsSpeculatorIndex future typesS&P BSE Sensex (in this, 30 underlying securities makes BSE sensitive Sensex)Nifty 50 (in this, 50 underlying securities makes NSEs nifty index)Nifty IT (in this, information technology shares makes up underlying ... Read More

Hedged items are identified and designated at inception of hedge. Recognized asset or liability, unrecognized firm commitment, forecasted transaction (highly probable), exposures (aggregated), net investment (foreign operations) etc., are some of the hedged items (provided they are reliably measurable).Exposure (aggregated) − Combination of derivative and exposure.Risk components − Financial and non-financial items are separately identifiable and reliably measured.Nominal amount − A proportion of the entire item and a layer component.International Financial Accounting Standards 9 (IFRS 9)Initially, IFRS 9 is the part of joint convergence imitative of IASB and FASB. Later they stopped working except for some part as they were ... Read More

Changes in fair value or cash flows of designated financial instruments should offset the change in fair value/cash flow of designated hedged items. That instrument is called a hedging instrument.ExampleMost oil companies need to hedge their exposure to energy prices which are volatile in nature. Choosing a suitable hedging instrument for the market is a hectic task. For a bearish environment, purchasing a put option is a superior strategy.To determine which instrument suits you, first you need to determine at what time exposure is priced. After exposure is priced, then determine the choice of instrument based on region (American, Asian ... Read More

In hedge accounting, items being hedged are to be identified and designated at inception of hedge.Some of the examples of hedge items are assets, liability, forecasted transaction (highly probable), net investment (foreign operation), firm commitment or group of above items.Hedged items essentially expose the entity to risk that changes fair value or cash flows (future) and these changes may affect income statements in present or future periods.Risks mostly hedged are foreign currency risk, equity price risk, credit risk, interest rate risk and commodity price risk.Internal or own equity instrument is not considered as a hedged item. Exposures to general business, ... Read More

Generally hedging instruments are financial instruments used by investors to offset potential changes in fair value of their hedged items.For example, if a company is selling and buying their products in international markets they are subject to foreign exchange risk, as the exchange rate (foreign currency to domestic currency) always fluctuates and sometimes it has a negative impact on the company’s profits.To minimise that risk, companies may purchase financial products to secure a specific exchange rate at a future date. Contracts of this type are known hedging instruments.Conditions to be hedging instrumentFinancial instrument to measure fair value through profit/loss.Contract with ... Read More

IFRS 9 and IAS 39 are two important accounting standards which tell how to account for financial instruments. IFRS is the recent standard which was released on 24/07/2014.DifferencesThe major differences between the International Accounting Standards 39 (IAS 39) and International Financial Reporting Standards 9 (IFRS 9) are as follows−IAS 39IFRS 9ScopeIts includes hedge accounting for fair value hedging interest rate risk for dynamic portfolio of financial instrumentsMay apply specific hedge accounting requirements in IAS 39 (portfolio of fair value hedging of interest rate risk)Credit exposuresCredit risk hedge accounting is not addressed specifically.An option is introduced to designate credit exposure.Hedging instruments ... Read More

Designating one or more hedging instruments so that it offset the change in fair value or change in cash flows of hedged items is called hedge accounting. Rules in IAS 39 are complex and strict.Thus, many companies could apply hedge accounting and prepare two financial statements (one with meeting IAS 39 standards and other is non-audited pro forma). Due to complexity in IAS 39, a new set of hedging rules were issued in IFRS 9 on November 19, 2013.Common points in IAS 39 and IFRS 9The common points in the Indian accounting standards (IAS 39) and the International financial reporting ... Read More

In hedge accounting, the fair value of derivative entries are adjusted and includes the value of opposing hedge for security (or) hedge accounting modifies the standard method of recognition of gains/losses on security and hedging instruments used to hedge position.In the same accounting period Position being hedged and the hedge are recorded. Sometimes these may differ from other accounts (those wont record hedges). Hedge accounting is mainly used by companies which affect their balance sheet due to significant market risk (interest rate, stock market, foreign exchange risks).Value hedging instruments change according to market movements which can affect income statements and ... Read More