ACF2100 Lecture Notes - Lecture 11: Interest Rate Swap, Financial Instrument, Cash Flow
3 Aug 2018
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Derivative financial instruments - hedging with foward contract. Derivative financial instruments create rights and obligations that have the effect of transferring between the parties to the instrument one or more of the financial risks inherent in an underlying primary financial instrument. A derivative financial instrument derives its value from the value of some other financial asset or variable. For example: share options derives its value from the value of a share. Derivative value rises and falls in accordance with the value of the underlying asset. Payoff is often determined or made at the expiration date. Sometimes no money is exchanged at the beginning of the contract. Examples of derivatives: forward contracts: currency; interest rates, options: currency; stock index; stocks; interest rates, futures contracts: stock index; stocks; commodity, swaps: currency; interest rates. Recognises the offsetting effects on profit or loss of changes in the fair values of the hedging intrument and the hedged item.
