IFRS 9 Hedge Accounting Introduction |

Currency SWAP operation

In a currency swap operation, also known as a cross-currency swap, the parties involved agree under contract to exchange the following: the principal amount of a loan in one currency and the interest applicable on it during a specified period of time for a corresponding amount and applicable interest in a second currency.

Exchange fixed floating rate payments

Currency swaps are often used to exchange fixed-interest rate payments on debt for floating-rate payments; that is, debt in which payments can vary with the upward or downward movement of interest rates. However, they can also be used for fixed rate-for-fixed rate and floating rate-for-floating rate transactions. Currency SWAP operation 

Each side in the exchange is known as a counterparty. Currency Read more

Objective of hedge accounting

Every entity is exposed to business risks from its daily operations. Many of those risks have an impact on the cash flows or the value of assets and liabilities, and therefore, ultimately affect profit or loss. In order to manage these risk exposures, companies often enter into derivative contracts (or, less commonly, other financial instruments) to hedge them. Hedging can, therefore, be seen as a risk management activity in order to change an entity’s risk profile. Objective of hedge accounting

Applying the normal IFRS accounting requirements to those risk management activities can then result in accounting mismatches when the gains or losses on a hedging instrument are not recognised in the same period(s) and/or in the same place in the Read more

Overview hedge accounting

Overview hedge accounting provides what is says, an overview to start understanding hedge accounting under IFRS 9.

Every entity faces risks from its business environment that can impact expected cash flows or the fair value of its assets and liabilities and, accordingly, have an effect on its earnings. An entity may face risks such as changes in the price or exchange rate for inputs required for its operations (e.g. labour or commodities), or changes in the costs of financing arising from changes in market interest rates. Consequently, it might undertake activities or transactions to manage the effect of these risks on its operations which is known as hedging.

For example, an entity may enter into contracts to purchase the commodities … Read more

What is moneyness in the valuation of options?

Options are instruments that belong to the derivatives family, which means its price is derived from something else (the underlying asset, items like listed shares, oil price futures, and many more). The price of an option is intrinsically linked to the price of the underlying asset.

A call option is an option to buy underlying shares on or before its expiration date. At the time of buying a call option you pay a certain amount of premium to the seller which grants you the right to buy the underlying shares at a specified price (strike price).

A put option is an option to sell an underlying shares on or before its expiration date.

Purchasing a put option means that you … Read more