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Growth & Empowerment Articles
Page 151 of 160
Explain index future contract
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 MoreHow are hedged items designated in the IFRS 9?
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 MoreExplain the hedging instruments which are designated in IFRS 9
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 MoreHow are the hedged items designated in IAS 39?
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 MoreExplain the hedging instruments designated in IAS 39
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 MoreWrite the differences between IAS 39 and IFRS 9
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 MoreWhat are the qualifying criteria for hedge accounting in IFRS 9?
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 MoreWhat are the qualifying criteria for hedge accounting in IAS 39?
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 MoreDifferentiate between fair value and market value
Fair value is used in the valuation of an asset and is the value at which an asset is exchanged between the parties. In other words, the fair value is the transaction amount paid between parties in the open market. It is also used in stock or share price.Market value is the value of assets decided by market. Market value is calculated based on present market price or stock price. Market value depends on demand & supply and willingness of investors. Not always market price and fair value are the same.Fair value of calculated based onMarket priceComparable prices of similar ...
Read MoreCompare mutual funds and exchange traded funds
Let us learn about mutual funds and exchange traded funds before understanding the differences between them.Exchange traded fundsIt is a fund which is traded on the stock exchange. Stocks and bonds come under exchanged traded funds. Price in the exchange traded funds varies throughout the day. Generally, fees in exchange traded funds are low and high liquidity.Exchange traded funds are used in hedging, arbitrage and equitizing cash. Exchange traded fund shareholders get part of profit in terms of dividends and interest earned. In liquidation they get residual value.In exchange traded funds, the following is applicable−No minimum investment is required.Broker fee ...
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