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Im really confused with cash flow and fair value hedge
firstly is there a reserve created for both cash flow hedge and Fair value Hedge,
secondly In cash flow hedge I was doing a question where the asset was sold on maturity for above the amount at which the futures contract was agreed at the fair value if the asset ,how is that possible? It was kaplan test your understanding 19
Thirdly, what do we do on Derecognition of asset and the instrument
Thank u sir sorry for bugging u
Hi,
I’m not aware of any particular reserves created for hedging, we just use retained earnings and other components of equity as normal.
On derecogition of the instrument the settlement is usually for cash. The treatment of the item usually involves the sale or purchase of goods and so another entry to cash. The two then net off each other.
The asset can be sold for any amount, above or below the futures contract value.
Thanks
then sir whats the point of fixing the value and saying that its a contract for specified time and specified amount,
secondly really appreciate your answers in this exam time
Hi,
Tanks for your kind comments, it’s much appreciated.
The reason is because we want to remove risk from the scenario. Yes that can mean we lose the upside risk as well as the downside risk but at least we have more certainty about the amounts to be paid or received in the future.
Thanks and hope the exam went well.
Thanks
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