Chapter 18 Derivative Instruments: Futures, Forwards, Options, Swaps, and Other Derivative Instruments

Introduction

18.01 The following section provides a discussion about the economic uses of derivative instruments and hedging activities. Refer to FASB Accounting Standards Codification (ASC) 815, Derivatives and Hedging, for accounting guidance on these topics.

18.02 The derivative instruments addressed in this chapter, which include futures, forwards, swaps, and option contracts, as well as other financial contracts with similar characteristics, have become important financial management tools for banks and savings institutions. These instruments collectively are referred to in this chapter as derivative instruments, which are defined for accounting purposes in paragraphs 83–139 of FASB ASC 815-10-15. This chapter provides background information on basic contracts, risks, and other general considerations to provide a context for related accounting and auditing guidance.

18.03 This chapter focuses on end uses of derivatives, rather than on the broader range of activities that includes the marketing of derivatives to others. Some banks and savings institutions, primarily large commercial banks, act as market makers or dealers in derivatives that are not traded under uniform rules through an organized exchange. The primary goals of those activities are to make a market and earn income on the difference between the bid and offer prices. Although the nature of the transactions often ...

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