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A derivative is recognized when there;
1. Have underlying value
2. Intend to settle in future
3. Enter at no/minimum cost
And i’m having doubt whether this is also one of criteria…’intend to settle net in cash’If yes, what does the sentence actually means? I’m still confuse everytime i see the derivative
Another question, if a company is looking to issue the following financial instruments;
1. 100 000 options to purchase 100 ordinary share in the co. for $350 in 1 year’s time. And the option will be settled net in shares.
So why does it actually a derivative contract ? And also treated as financial liability?
I really hope you can clear my misunderstanding On this 🙁
Please put your questions in separate threads
Only derivative if settled in cash or with another financial asset. If I have an option to buy sausages settled in cash – then, at the end of the contract, no sausages are transferred – you just settle up in cash for the difference in price.
Your second question looks like a derivative and FL to me.
My second question is indeed derivative and FL but i was confused on how you can see it as both? What the keyword that help to identify it?
Option = derivative = unless it says in the question ‘option on sausages with delivery in sausages’ (i.e. a commodity)
FL = settlement will be for a variable (not fixed) number of shares
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