Accounting for corporate finance: derivative contracts: specific derivatives under Old UK GAAP
This guidance applies for Old UK GAAP (excluding FRS 26).
Accounting for specific derivatives
As explained at CFM13010 onwards, a number of financial risks can be managed through the use of derivatives. The two most common types of risk that you are likely to encounter are:
- foreign exchange risk
- interest rate risk.
Annual data produced by BIS (Bank of International Settlements) on global over-the-counter (OTC) derivatives outstanding at 31 December 2013 analyses the total market value of such contracts of $18.7bn. $14bn of this total are interest rate derivatives, and $2.3bn are foreign exchange derivatives. Thus derivatives dealing with these two types of risk account for 87% of this type of derivative market at the end of 2013.
This section of the guidance thus focuses on these two areas and assumes that these financial instruments are used for hedging purposes. Instruments used for speculative purposes are briefly considered at CFM24440.
The principal methods of hedging both foreign exchange and interest rate risks are:
- forward contracts