2 - financial instruments.ppt

1、Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,Advanced Accounting II,Topic 1: B - Derivatives,1,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H.

2、 Anthony, and Suzanne Lowensohn,Derivatives : Objectives,Understand the definition of a derivative and the types of risks that derivatives can reduce. Understand the structure, benefits, and costs of options, futures, and forward contracts.,2,Financial instruments,A financial instrument Cash, eviden

3、ce of ownership or any contract that both Imposes on one entity a contractual obligation to deliver cash or another financial instrument; and Conveys to the other entity the right to receive cash or another financial instrument Types of financial instruments: Primary financial instruments: include r

4、eceivables, payables and equity securities such as ordinary shares Derivative financial instruments,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,3,Based on slides accompanying Advanced Accounting, 10th ed

5、ition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,Derivatives (def.),Derivative is a name given to a broad range of financial instruments. create rights and obligations with the effect of transferring one or more of the financial risks inherent in an underlying prim

6、ary financial instrument Derivatives include financial options, futures, forward contracts and interest rate and currency swaps The derivative contracts value to the investor is Directly related to fluctuations in price, rate or some other variable that underlies it. Value is derived from another it

7、em whose value is variable over time.,4,Characteristics of derivatives,Must contain at least 1 underlying amount and at least 1 notional amount Underlying amounts - financial or physical variables that have observable or verifiable changes e.g., exchange rates, prices, price indexes, occurence of sp

8、ecified payments Notional amounts number of currency units, shares or other units specified in the financial instrument,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,5,Characteristics of derivatives (cont)

9、,Requires no or very small initial net investment The contract may be settled: at the net position; through delivery of an asset that puts the recipient in an economic position similar to net position; or net by a market outside of the contract,Based on slides accompanying Advanced Accounting, 10th

10、edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,6,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,Forward Contracts,Forward contracts Negotiated contracts between two pa

11、rties For the delivery or purchase of A foreign currency (most commonly) or A commodity At an agreed upon price, quantity, and delivery date. Settlement of the forward contract may be Physical delivery of the good, or Net settlement,7,Forward Contracts (cont),1/12/2010: Forward exchange contract for

12、 the receipt of US$200,000 on 31/1/2011 at a forward rate of A$1.00 = US$1.04 1/12/2010: Dr. Foreign currency receivable192,307 Cr. Forward contract192,307,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,8,F

13、orward Contracts (cont),Note: if longer term, needs to be recorded at present value we will consider this when looking at forward contracts as hedging instruments,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowens

14、ohn,9,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,Futures Contracts,Futures contracts are specific types of forward contracts A futures contract is: An agreement which provides that something will be bou

15、ght or sold in the future at a fixed price agreed at the date of the agreement Results in the ultimate transfer of cash or another financial instrument Characteristics are standardized and are set by futures exchanges Rather than by the contracting parties - Exchange guarantees performance - Settlem

16、ent may also be made by entering another futures contract in the opposite direction,10,Futures (cont),Types of financial futures currently traded: 90-day bank bill futures 3-year bond futures 10-year bond futures share price index futures (SPI futures) futures for shares in specific companies Huge l

17、osses (or gains) can be made on the futures market,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,11,Futures (cont),Futures contracts can be used for hedging purposes and speculative purposes: Hedgers: Esta

18、blish now the price of the commodity in which they will deal in the future. Speculators: Have no wish to deal in the commodity itself. But are willing to trade in futures contracts in the hope of profiting from correctly anticipating movements in the futures price.,Based on slides accompanying Advan

19、ced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,12,Futures (cont),Example: I hold 50,000 shares in BHP Billiton which I cannot sell for 1 month. Current price of the shares is $26.00 Enter a futures contract to sell 50,000 BHP Billiton share

20、s . The price of the futures is $26.20 on date of entering contract the price is locked in.,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,13,Futures (cont),After 1 month: futures price has dropped to $23.4

21、3. share price has dropped to $23.20 Have I made a gain by entering the futures contract? Yes the other party to the contract has to pay $1,310,000 ($26.20 x 50,000), whereas if I just sold the shares I would only receive $1,160,000 ($23.20 x 50,000) We will consider the use of futures as a hedge se

22、parately,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,14,Futures (cont),Accounting for futures: Payment of deposit Dr. Deposit on futures contract / Cr. Cash Record change in value of contract Dr or Cr De

23、posit on futures contract / Dr or Cr Gain or loss on futures contract Close out contract Account for change in value Dr cash / cr deposit on futures contract,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,1

24、5,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,Options,With options, only one party is obligated to perform The other party has Ability, But not obligation to perform,16,Options (cont),Important to unders

25、tand: Put options (the right to sell) Call options (the right to buy) Exercise price,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,17,Accounting for option contracts,The option buyer pays the option writer

26、 a cash premium. Payment of the option price provides the call option buyer with the right of either: Selling the option at the ruling call option price; or Buying the underlying financial instrument at a predetermined price Buyer of a put option has the right of either: Selling the option at the ru

27、ling put option price; or Selling the underlying financial asset at a predetermined price,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,18,Options (cont),1 September 09: Trader acquires parcel of 10,000 op

28、tions in BHP at $0.40 each Gives right to acquire shares in BHP at any time in next year for $26.00 At 30 June 10: BHP shares increased so that value of option has risen to $0.85 each 30 September 10, option is exercised,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beam

29、s, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,19,Options (cont),1 Sept 09: To record investment in share options: Dr Investment in share options4,000 Cr Cash at bank4,000 30 June 10: To value share options at fair value: Dr Investment in share options4,500 Cr OCI - gain on share opti

30、ons4,500,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,20,Option contracts and futures contracts,A futures contract requires the delivery of the underlying asset, whereas: an option buyer chooses whether d

31、elivery will occur. When a futures contract is made: The payment of the futures price is not required until the expiry date When an option contract is made: The buyer must immediately pay the option price to the writer If the option is subsequently exercised: there is a further transaction when the

32、exercise price is paid.,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,21,Next we will consider the use of these financial instruments in hedge arrangements,Based on slides accompanying Advanced Accounting,

33、 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,22,Question 1,Textbook question 10,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,23,Question 2,A Ltd enters into

34、a futures contract on B Ltd shares in which A Ltd takes a sell position. The price of a B Ltd future is $4.85 and the futures contract is for 100 000 units One month later a B Ltd future costs $6.15. A Ltd closes out the futures contract. Did A Ltd gain or lose on the futures contract?,Based on slid

35、es accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,24,Question 2 (cont),A Ltd has made a loss on the futures contract as it has a contract to sell the futures at $4.85 which is well below their current market price. The los

36、s on the futures is ($6.15 $4.85) 100 000 = $130 000.,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,25,Question 3,On October 1 2011 Tan Ltd enters into a forward exchange contract for the receipt of 2,000,

37、000 from a foreign exchange broker. The term of the contract is 6 months. Tan Ltds year end is 31 December Forward Exchange rates: 1 Oct 2011$0.0075 31 December 2011$0.0077 1 April 2012$0.0076,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph

38、H. Anthony, and Suzanne Lowensohn,26,Question 3 (cont),Valuation of receivable: 1 Oct 2011 $0.0075 =15,000 31 December 2011 $0.0077 = 15,400 1 April 2012 $0.0076 = 15,200,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzann

39、e Lowensohn,27,Question 3 (cont),1 October 2011 Dr. FC receivable15,000 Cr. Fwd exchange contract15,000 31 December 2011 Dr. FC receivable 400 Cr. Exchange gain 400,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowe

40、nsohn,28,Question 3 (cont),1 April 2011 Dr. Exchange loss 200 Cr. FC receivable200 Dr. Cash15,200 Cr. FC receivable 15,200 Dr. Fwd Exchange contract15,000 Cr. Cash 15,000,Based on slides accompanying Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn,29,Question 4,Martin Corporation enters into a forward contract on 2 October 2008 to speculate in Euros (). Martin is