Currency swap is an agreement between the parties to exchange principal amounts of different currencies at a predetermined rate on a future date.TypesThe two types of currency swaps are as follows −Fixed to fixed − Exchange of fixed interest payments in one currency on loan equivalent in other currency.Fixed to floating − Fixed rate obligations in one currency are exchanged for floating rate obligations in other currency.StagesThe stages included in the currency swaps are as follows −Foreign exchange market is spotted.Exchanging of interest payments during swap term is carried out.On maturity principle is re-exchanged.Principal is usually exchanged in any of ... Read More

Interest rate swap is an agreement between parties to exchange interest rates. Let’s say, we have two parties (first party and second party). Then, the most commonly used interest rate agreement is “first party agrees to pay at fixed interest rate to second party and second party agrees to pay at floating interest rate to first party”. Mostly banks, corporations and investors use interest rate swaps.Reasons to useThe reasons to use the interest swap rates are explained below −Offset risk of floating interest rate.To lock the future fixed rate.Leverage rate between the currencies.To speculate on the predicated fluctuation rates.TypesThe two ... Read More

Currency futures is a type of contract in which two sides agree to exchange a specific quantity of a particular currency on a specific date at a pre agreed price. These are legally binding agreements and on expiry date, counter parties will have to deliver the amount on a delivery date at pre agreed price. They can also be used to hedge the currency risks or price speculations.Specifications of currency futures are as follows −Parties to the contract.Size of contract.Position limitations.Spot and future prices.Margins requirements (initial, maintenance, variations margins).Market to market.Formula to calculate the currency future is given below −Currency ... Read More

A future contract is the contract between a buyer and a seller, where the buyer agrees to buy a particular asset at a predetermined price. Buyer in the future contract will hold a long position and the seller will have a short position.Future contracts allow companies to hedge their risk associated with the interest rates, exchange rates and business risk with commodity prices. Future contract helps investors to obtain exposure to a stock or a bond or a market (stock) index or any other financial assets.FeaturesThe features of future contract are as follows −Organised exchanges − These are traded in ... Read More

Hedge ratio is a ratio of value of hedge position to the value of total exposure. Value of hedge position is the total amount invested by investors in hedged position and value of total exposure is total amount invested by investor in underlying assets.Hedge ratio also can be a comparative value of future contracts, which are sold or purchased with change in value of cash commodity that are being hedged. Hedge ratio is expressed in decimal or fraction. If value is zero means, position is not at all hedged, similarly, if the value is one means, position is fully hedged.Investor ... Read More

In this method, companies are allowed to recognize their gains and losses on hedging instruments against exposure of derivative instruments to reduce income volatility, if both are accounted separately.The main purpose of hedge accounting is to match the derivative gain/loss with underlying investment gain/loss. Its main advantage is that it can recognize both the transactions in the same accounting period.Hedge accounting International Financial Reporting Standards (IFRS) 9 contains the following −Classification and measurement of financial instruments.Impairment of financial assets.TypesThe types of hedge accounting are as follows −Fair value hedge − Change in fair value of asset/liability/unrecognised firm commitment.Cash flow hedge ... Read More

Hedging is designed to protect the share value from market volatility. In simple words, it acts like an insurance coverage which protects you from any potential loss.The main purpose of hedging is to minimise/eliminate risk by offsetting the potential losses. Investors follow this to safeguard their investments from losses due to market volatility. Hedging is also done in areas like commodities, securities, currencies etc.TypesThe types of hedging include −Forward contractsFuture contractsMoney marketsStrategiesThe various strategies to mitigate losses are as follows −Asset allocation − Portfolio diversification.Structure − Some part is invested in portfolio and some in derivatives.Through options − Options of ... Read More

The major differences between Indian GAAP (Generally Accepted Accounting Principles) and US GAAP (United States Generally Accepted Accounting Principles) are as follows −Indian GAAP (Generally Accepted Accounting Principles)Financial statements are prepared in accordance with the principle of conservatism.Financial statements are prepared with presentation requirements of schedule VI of companies ACT, 1956.Only listed companies are mandated for cash flow statements.Provides prescribed depreciation rates (schedule XVI of companies Act, 1956).No requirement is provided for a portion of long term debt.Preparation of financial statements for subsidiary companies is not mandatory.Investments are classified as current investments, long term investments and investment property.For integral and ... Read More

ProblemABC Company entered into a forward contract to buy its own shares.Details for the same are given below and here, XXXX refers to the respective year.Contract date − 1st Jan XXXXMaturity date − 31st Dec XXXXExercise price of $110No of shares − 1500Market price − $100 (as on 1st Jan XXXX)Market price − $150 (as on 1st Mar XXXX)Market price − $130 (as on 31st Dec XXXX)Calculate the accounting entries for forward contract as per the given information.SolutionThe solution is explained below −Fair value of forward (on 31st March) = 1500 * (150 -110) => 60000Fair value of forward (on 31st ... Read More

The accounting for forward contracts is written as follows −Here, XXXX and XXX refer to the respective amount.RecognizeSince the agreement is for a future date, it should be accounted for now (date of signed, date of which physical exchange).CreditDebitAsset obligationXXXXAsset ReceivableXXXXRecording (seller perspective)Asset obligation credited for spot rate and asset receivables and contra asset debited/credited for forward rate. Contra asset is the difference between spot rate and forward rate.CreditDebitAsset obligationXXXXAsset ReceivableXXXXContra assetXXXXXXRecording (from buyer perspective)Payable amount credited at forward rate and contra asset credited/debited at contra asset account. Asset receivable debited.CreditDebitContracts receivableXXXXAsset obligationXXXXContra assetXXXXXXRecording on date of exchange (seller perspective)Asset ... Read More