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Generally hedging instruments are financial instruments used by investors to offset potential changes in fair value of their hedged items.For example, if a company is selling and buying their products in international markets they are subject to foreign exchange risk, as the exchange rate (foreign currency to domestic currency) always fluctuates and sometimes it has a negative impact on the company’s profits.To minimise that risk, companies may purchase financial products to secure a specific exchange rate at a future date. Contracts of this type are known hedging instruments.Conditions to be hedging instrumentFinancial instrument to measure fair value through profit/loss.Contract with ... Read More

IFRS 9 and IAS 39 are two important accounting standards which tell how to account for financial instruments. IFRS is the recent standard which was released on 24/07/2014.DifferencesThe major differences between the International Accounting Standards 39 (IAS 39) and International Financial Reporting Standards 9 (IFRS 9) are as follows−IAS 39IFRS 9ScopeIts includes hedge accounting for fair value hedging interest rate risk for dynamic portfolio of financial instrumentsMay apply specific hedge accounting requirements in IAS 39 (portfolio of fair value hedging of interest rate risk)Credit exposuresCredit risk hedge accounting is not addressed specifically.An option is introduced to designate credit exposure.Hedging instruments ... Read More

Designating one or more hedging instruments so that it offset the change in fair value or change in cash flows of hedged items is called hedge accounting. Rules in IAS 39 are complex and strict.Thus, many companies could apply hedge accounting and prepare two financial statements (one with meeting IAS 39 standards and other is non-audited pro forma). Due to complexity in IAS 39, a new set of hedging rules were issued in IFRS 9 on November 19, 2013.Common points in IAS 39 and IFRS 9The common points in the Indian accounting standards (IAS 39) and the International financial reporting ... Read More

In hedge accounting, the fair value of derivative entries are adjusted and includes the value of opposing hedge for security (or) hedge accounting modifies the standard method of recognition of gains/losses on security and hedging instruments used to hedge position.In the same accounting period Position being hedged and the hedge are recorded. Sometimes these may differ from other accounts (those wont record hedges). Hedge accounting is mainly used by companies which affect their balance sheet due to significant market risk (interest rate, stock market, foreign exchange risks).Value hedging instruments change according to market movements which can affect income statements and ... Read More

Fair value is used in the valuation of an asset and is the value at which an asset is exchanged between the parties. In other words, the fair value is the transaction amount paid between parties in the open market. It is also used in stock or share price.Market value is the value of assets decided by market. Market value is calculated based on present market price or stock price. Market value depends on demand & supply and willingness of investors. Not always market price and fair value are the same.Fair value of calculated based onMarket priceComparable prices of similar ... Read More

Let us learn about mutual funds and exchange traded funds before understanding the differences between them.Exchange traded fundsIt is a fund which is traded on the stock exchange. Stocks and bonds come under exchanged traded funds. Price in the exchange traded funds varies throughout the day. Generally, fees in exchange traded funds are low and high liquidity.Exchange traded funds are used in hedging, arbitrage and equitizing cash. Exchange traded fund shareholders get part of profit in terms of dividends and interest earned. In liquidation they get residual value.In exchange traded funds, the following is applicable−No minimum investment is required.Broker fee ... Read More

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 More

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 More

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 More

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 More