Page 93 - F2 Integrated Workbook STUDENT 2019

Financial instruments

5.3 Common examples of derivatives

Forward – a contract to buy or sell at a date in the future at a specific
price determined now (based on today’s prices).

Futures – same as forward but an active market exists (forwards are
bespoke; futures all have the same characteristics).

Options – an option to buy or sell in the future at a price set now.
Less risky as the option holder does not need to exercise the option if
it is loss making.

5.4 Accounting for derivatives

Derivatives are classified as FVPL.

 Revalue to fair value

 Gains or losses go to
P/L

If derivative makes a gain – show as a financial asset.

If derivative makes a loss – show as a financial liability.

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