BU397 Lecture Notes - Lecture 5: Executory Contract, Financial Instrument, Interest Rate Risk
Document Summary
Not accounted for as derivatives, and recognized when goods received if: There are no net settlement features (can settle for cash or other assets instead of taking delivery) There are net settlement features, but company intends to take delivery and therefore designates contracts (cid:498)expected use(cid:499: under aspe: Not accounted for as derivatives because difficult to measure. Holder has the right, but not the obligation, to buy the (cid:498)underlying(cid:499) at a preset. Holder has the right, but not the obligation, to sell the (cid:498)underlying(cid:499) at a preset price (strike or exercise) price: put option. Forwards: under a forward contract, parties each commit upfront to do something in the future (obligation) The price and time period are locked in under the contract: therefore, forward contracts are specific to the transacting parties and. Banks are usually involved in forward contracts: forwards are measured at the present value of any future cash flows. Futures: futures are similar to forwards except:
