Derivatives

Is a special type of financial instrument that can be either FA or FL depending on

the underlying item - can give rise to gain or losses
If we have a gain, favorable FI so a derivative that is FA. If FI that gives rise
to unfavorble or losses, that is a FL w/in financial statement.

It is a financial instrument with a value that is reliant upon or derived from an

underlying item

To identify
1. Its value changes in response to the change in an underlying item

An underlying asset can be used to identify the item within the agreement that
provides value to the contract.
For example
if there is a stock option to purchase100 shares of X Company @ a price of $100,
the underlying asset is the stock of X Company. The stock balue is used to
determine the value of the option up till expiration. Prone to changes si stock,
yung value din ni UA ay pinapaalam sa trades whether the option is worth exercising
or not.

(interest rate
as the exchange rate fluctuate,
as the commodity price go up or down
you may pay more or less for the goods that you are contracted to buy under this
instrument

if you have forward contact to buy oranges, that contract will go up and down and
value depending on what happen if you like to the value of oranges in the open
market.

100 oranges for 100 dollars

so if after 10 months 110 in open market.
You can pay them for 100 dollars, with your future contract you were able to buy
them in just 100 dollars so it's a gain and a financial Asset. My future allows me
to buy me at 100 dollars, it gives more value to the contract if it will go up yung
value of contract< if it will go down, less value.
The value of this contract will fluctuate, the worth of it to somebody else will
change,

2. @ INITIAL DATE OF TRANSACTION, no initial net investment or very small

sign up lang, small fee na in terms sa overall value nung contract negligable
naman.
Hindi na recorded usually kasi nga fairvalue nya ZERO
after noon, recorded na sya @ notional X underlying

3. Settle at a future date

today sign up, but will be transacted in the future.
Since it is a executory contract meaning yung performance nung contract is in the
future pa.
(dependent sa pagtaas at pagbaba noong underlying asset)

Initial recog FV - zero

Subsequently with any gains or losses through pnl
When derivatives are used to manage risk, buyer of derivatives will forgoes
potential gain in exchange sa security for potential losses. No gains than to
suffer losses "playing safe"