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Instrument of Coverage

A financial instrument that, in a hedging transaction, is designed to hedge a specifically identified risk that may have an impact on the profit and loss account as a result of changes in the fair value or cash flows of one or more hedged items. In general, the instruments that can be designated as hedging instruments are derivatives.

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23 views

Instrument of Coverage

A financial instrument that, in a hedging transaction, is designed to hedge a specifically identified risk that may have an impact on the profit and loss account as a result of changes in the fair value or cash flows of one or more hedged items. In general, the instruments that can be designated as hedging instruments are derivatives.

Uploaded by

aldo porto lopez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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INSTRUMENT OF COVERAGE

A financial instrument that, in a hedging transaction, is designed to hedge a specifically


identified risk that may have an impact on the profit and loss account as a result of
changes in the fair value or cash flows of one or more hedged items.

In general, the instruments that can be designated as hedging instruments are derivatives.

What are financial derivatives?


Derivatives are financial instruments whose value depends on the value of an underlying
asset.

They are used as hedging instruments against fluctuations in variables such as the exchange
rate, interest rate or the price of some good. Some examples of derivatives that are traded
in the market are:

Forward: It is an instrument that gives the obligation to buy an asset (currencies), at a


price agreed upon a certain date. The most common derivatives of this type are the
exchange rate.

In these contracts, a party agrees to sell a certain amount of dollars at a moment of time,
agreeing a rate for the operation.

The position of the agent that undertakes to buy the asset is called the long position while
that of the agent that undertakes to sell it is called the short position.

Options: They are instruments that give the right to buy (call options) or sell (put options)
an asset in the future at a certain price, with the fulfillment of an established condition. This
right is acquired with the payment of a premium and can be exercised with the fulfillment of
a previously established condition.

The main difference between the options and the forward is that the options are traded is
the right to buy or sell the asset, limited to the fulfillment of a condition in a certain period,
while in the forward, there is an obligation to buy or Sell in the term and at the agreed
price, without the necessity of the fulfillment a condition.

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