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Accounting for Investments, Equities, Futures and Options, Volume 1 by R. Venkata Subramani

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CHAPTER 5

Equity Derivatives: Theory

LEARNING OBJECTIVES

After studying this chapter, you will learn the following:

  • Accounting standards for equity derivatives.
  • Derivatives in a financial security.
  • Various types of derivative contracts.
  • Definition of derivatives according to accounting standards.
  • Differences between U.S. GAAP and IFRS pertaining to derivatives.
  • Forward contracts and futures contracts and the difference between futures and forwards.
  • Rationale behind hedging, speculation, and arbitrage in a futures contract.
  • Limitations of forward market.
  • Advantages of a futures contract.
  • Components of a futures contract.
  • Pricing of a futures contract.
  • Stock futures and index futures.

ACCOUNTING STANDARDS FOR EQUITY DERIVATIVES

This chapter covers the accounting requirements for equity futures contracts. An equity future is a form of derivative and, if used for hedging, requires a special hedge accounting treatment.

The accounting treatment under the U.S. GAAP is covered by the accounting standards FAS 115 and FAS 133. Under the International Financial Reporting Standards, IAS 39 deals with this topic.

Relevant Accounting Standards

U.S. GAAP IFRS
FAS 52—Foreign Currency TranslationFAS 94—Consolidation of All Majority-owned SubsidiariesFAS 115—Accounting for Certain Investments in Debt and Equity SecuritiesFAS 130—Reporting Comprehensive IncomeFAS 133—Accounting for Derivative Instruments and Hedging ActivitiesFAS 157—Fair Value MeasurementsFAS 159—The Fair Value Option ...

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