What is Characteristics of a derivative?
In short
A financial instrument is a derivative if it has one or more underlyings and notional amounts (or payment provisions), requires little or no initial net investment, and can be settled net.
Key takeaways
- An underlying is a variable such as an interest rate, a price or an exchange rate.
- Derivatives are measured at fair value on the balance sheet.
- Contracts for normal purchases and sales of goods the entity uses can be excluded.
Where it's tested
BAR: Derivatives & Hedge Accounting — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company with variable-rate debt enters into an interest rate swap to pay fixed and receive variable, properly designated and documented as a hedge. Where are changes in the swap's fair value reported?