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Growth & Empowerment Articles
Page 152 of 160
Write the accounting entries for cash flow hedge
Cash flow risk is defined as the variability of cash flows for an existing asset or liability of future transactions due to particular risk. Cash flow hedges protect margins, revenues and expenses of companies from foreign exchange riskFacts to know about cash flow hedges are as follows −To receive special accounting treatment, hedged exposures must meet specific guidelines.Exposure Timing and probability are very important.Birth of cash flow exposure.Reduces derivative trading volume for exposure maturity of hedging cash flows.Account for cash flow hedgeStep 1 − At reporting date gain or loss on hedging instrument and hedged item is determined.Step 2 − Both effective ...
Read MoreWhat is a cash flow hedge?
Cash flow hedge is an investment method used to control and mitigate any sudden change in either cash inflow or cash outflow of an asset/liability/forecasted transaction. Sudden change is due to various reasons like change in interest rate, change in prices, fluctuations in foreign exchange rates. Transaction with another party on a future date is called a forecasted transaction.Accounting for cash flow hedgeHedging item (effective portion of loss or gain recognized in other comprehensive income and ineffective portion of loss or gain is recognized in earnings).Hedged item (effective portion of loss or gain is recognized in other comprehensive income initially, ...
Read MoreWhat is a fair value hedge?
It is an investment position taken by an investor or by a company to protect fair value of their specific asset/liability/unrecognised commitment from risk which can affect their profit and loss account.In other words, it is a derivative instrument to balance their risk in other investments to offset potential losses in fair value of their assets/liability/unrecognised commitments.Accounting for fair value of hedge For derivatives of hedging instruments loss or gain is measured according to IAS 21 and for non-derivative hedging instruments is recognized as immediate loss or gain.Carrying amount of the hedged item is adjusted through gain or loss on the ...
Read MoreCompare hedge fund and exchange traded fund
People have different goals in terms of investments, some will go for financial securities and some may go for extra income and others may save for retirements etc. to reach their goals people invest in different options like hedge funds, Exchange traded funds, bonds etc.In this, we will compare hedge funds and exchange traded funds.Hedge fundsThese are private portfolio investments, to generate returns it uses management strategies and risk investments. These are open to limited persons and preferences will be given to high net worth investors. Leverages, even short selling and options are different investment strategies used in hedge funds.CharacteristicsOnly ...
Read MoreCompare private equity funds to hedge funds
Private equity term is used when investors use their funds for acquisition of public entities or in investment in private companies whereas hedge funds are privately owned entities that used to raise funds from investors and invest them back in financial instruments.Private equity funds are used in company acquisition, expansion or to strengthen the balance sheet whereas private equity is used for fundraising.Private equitySignificant parts of private equity are accredited and institutional investors because they can commit large amounts for a longer period of time. Private equity also converts public companies into private companies.Hedge fundsProtecting from financial losses is called ...
Read MoreDifferentiate between investment and speculation
Investment is nothing but investors hold the asset or security for a long period of time whereas speculation is for profit making and used usually for a shorter period of time.In other words investments assure amount safety and good returns whereas speculation is opposite to investment that means amount safety and return is not assured. Amount in investment is consistent and the amount in speculation is inconsistent.InvestmentInvestment involves purchase of assets or security hoping it will generate income or expected to appreciate in future. Financial investments include purchasing of bonds or stocks, mutual funds etc. the word investment is not ...
Read MoreDifferentiate hedging and forward contract
Financial markets are complex and large in size. Before going for differences let us try to understand the terms hedging and forward contract in brief.HedgingIt is the technique which is used to reduce the risk of financial assets. Risk of uncertainty of future income is involved. By hedging they can be certain about future value and date.Some of hedging instruments are as follows −Exchange traded instruments: only traded with standardized investment sizes in organized exchanges.Over the counter instruments: structured exchange is not present or no structured exchange.Commonly used hedging instruments are forwards, futures, options and swaps.Forward contractLet us try to ...
Read MoreDifferentiate between hedging and speculation
Hedging and speculators play an important role in markets. Hedgers protect themselves against reduced risk of commodities by hedging and by speculation speculators earn profits from changes.HedgingThe term hedging is used to minimize risk of loss due to price movement in the market.This is done by holding two different positions in different markets. In most cases, Loss or gain in one market offset price movements in another market.Some of the advantages are increases liquidity, lowers margin, can invest in various assets, offers flexible price mechanism.Hedging strategies − Forward contract, future contract and money markets.Investors hedge by asset allocation, structure and ...
Read MoreCompare between options and warrants
Both options and warrants are derivatives traded in exchange and give investors an option to buy at pre agreed date and price. The main differences between two are warrants are financial instruments whereas options are contracts. Values ascertained from livestock’s, bullion etc.OptionsThese are derivative securities in the fundamental category in which one party acquires right buy or sell but not right to obligation buy or sell at strike price at a particular date. Option buyer has the right to buy or sell security whereas option seller is the one who confers.Option premium is charged by seller to buyer. The underlying ...
Read MoreDifferentiate between call option and put option
Investors have different options to invest their money in stock markets. One of them is the options category of securities in which they trade their securities at agreed date and price.Options are sub divided into the following −Call optionIn this option buyer has the right to buy assets at strike price at a particular date. To acquire call option investors have to pay some upfront cost call premium through which they can get the right to purchase a product at a fixed price on a particular date. Stocks, currencies, bonds etc. covered in call options.ExampleLet’s say, a buyer and seller ...
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