RSM221H1 Chapter Notes - Chapter 16: Executory Contract, Interest Rate Risk, Pork Belly
Document Summary
Financial instruments: contracts that create both a financial asset for one party and a financial liability or equity instrument for the other party. Primary financial instruments: most basic financial assets and financial liabilities, such as receivables and payables, equity instruments like shares. They get their value from an underlying primary instrument, index, or non-financial item, such as a commodity. Derivatives have three characteristics: value changes in response to the underlying instrument, little or no initial investment, settled at future date. Options, forwards, and future are common types of derivative instruments. Derivatives are measured at fair value with gains and losses through net income. Derivatives exist to help companies manage risks. Interest rate risk: changes in market interest rates: other price risk: changes in market price (other than currency and interest risk) Derivatives often expose the company to additional risks. Forward contract: reduces market risk, sign contract at current price today, deliver later.
