Reference no: EM132956966

The following scenarios assume that the derivatives in question are not settled to market.

Scenarios

1. A derivative is entered into by an entity in order to gain from short term price fluctuations. It is not used for hedging purposes.

2. A derivative is entered into with the intention to hedge certain risks. Hedge accounting is not applied. The hedged item is a loan with fixed interest payments with a term of 5 years and annual payments. The derivative is a fixed-floating interest rate swap with the same life and the same notional amount and annual payments.

3. A derivative is entered into with the intention to hedge certain risks. Fair value hedge accounting is applied. The hedged item is a loan with fixed interest payments with a term of 5 years and annual payments. The derivative is a fixed-floating interest rate swap with the same life and the same notional amount and annual payments.

4. An embedded derivative is identified in a financial liability host contract. It is not considered closely related to the host contract and is accounted for separately at fair value and presented as a derivative asset or liability separately from the host financial liability. It is not held primarily for the purpose of trading.

5. An embedded derivative is either (a) considered closely related to the host contract and is not accounted for separately or (b) it is not considered closely related to the host contract and is accounted for separately at fair value with the hybrid contract presented as one financial liability measured at the sum of the carrying amounts of the host and the embedded derivative.

Problem 1: In the above scenarios, how is the derivate presented? Discuss the reason for each scenario.