Derivatives and Hedge Accounting, Accounting - Auditing

[Pradeep Kaushik]

Dear All,

Please tell me, what is Derivatives and how we determine the loss or profit from derivatives.

Please also let me know that what is Hedge accouting.

Best Regards.

Pradeep kaushik

Posts / Replies

[CHITRA RAGURAM]

Derivative is a financial instrument, which dervies its value based on the existing price discouted to future date. Kinds of derivative are forwards, futures, swaps, options.

Hedge is a term that comes under Derivate. Hedge is a attempt to reduce risk.

Accounting in brief

Take a forward contract. It is a Derivate to hedge ur exchange rate risk.

Contract Details: Type: IMPORT, Currency: USD/INR, Value: USD 1,000,000/- Spot: 44.50, Premium: 0.45, Bank Margin: 0.05. Forward Rate: 45. Maturity Date: 31/05/2011

The premium of Rs. 4,50,000/- (0.45 * 1000000) and Margin of Rs. 500,000/- (0.05 * 1000000) is to be amortised over the period of the Contract.

If the contract is cancelled in between say 30/04/2011 at a profit of Rs. 100,000/-, the banker will pay ur profit only on 31/05/2011. Hence u need a pass an accrual entry on 30/04 and the receipt entry to be made on the due date of the contract.