ACCT 352 Lecture Notes - Valuation Of Options, United States Dollar, Interest Rate Risk
22 May 2012
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Document Summary
Financial instruments are contracts that create both a financial asset for one party and a financial liability or equity instrument for the other party. Primary financial instruments include most basic financial assets and financial liabilities such as receivables and payables, as well as equity instruments such as shares. They are called derivatives because they derive (get) their value from an underlying primary instrument, index, or non financial item, such a commodity (called the underlying). They transfer risk that are inherent in the underlying primary instrument without either party having to hold any investment in the underlying. They have three characteristics: their value changes in response to the underlying instrument (the underlying). they require little or no initial investment they are settled at a future date. As a basic rule, derivatives are measure at fair value with hains and losses booked through net income. There are different layers of cost relating to the use of derivatives.
