Derivative security

(redirected from derivative instrument)
Also found in: Dictionary, Thesaurus.

Derivative security

A financial security such as an option or future whose value is derived in part from the value and characteristics of another security, the underlying asset.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Derivative Security

Futures, forwards, options, and other securities except for regular stocks and bonds. The value of nearly all derivatives are based on an underlying asset, whether that is a stock, bond, currency, index, or something else entirely. Derivative securities may be traded on an exchange or over-the-counter. Derivatives are often traded as speculative investments or to reduce the risk of one's other positions. Prominent derivative exchanges include the Chicago Mercantile Exchange and Euronext LIFFE.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
H3: Firms whose insiders use derivative instruments are likely to see an increase in investment (i.e., R&D, capital expenditures, and advertising expenditures) and firm risk (i.e., stock return volatility and cash flow volatility) following the use of a derivative instrument.
As a rule, derivative instruments are reported at fair value in the financial statements.
"The successful refinancing with Barclays Bank is clear evidence of the confidence that financial institutions now have in Welsh rugby and I am particularly pleased that we have rid ourselves of the old derivative instruments which have burdened us for some time and were becoming increasingly problematic.
If the hedge fund is engaged in complicated risk strategies, including use of derivative instruments in which the risks are embedded in the instruments themselves and not as easy to ascertain, and including situations in which counterparties arc not well known, it may be very difficult for a regulator to know what to do.
The scope of the new SEC rules is broader than FAS 119, expanding disclosure requirements beyond the boundary of financial derivative instruments. The SEC issuance states that market risk is inherent in derivative and nonderivative instruments, including:
Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities, explains more about derivative underlyings in Appendix C:
GASB has issued Guide to Implementation of Statement 53 on Derivative Instruments, available at www.calcpa.org/53, to assist with the implementation of its recently issued standard on accounting and financial reporting for derivative instruments.
* The consistent critical terms method compares the terms of the derivative instrument with the terms of the hedgeable item to determine that they are either the same or essentially similar.
"Derivative instruments are risk management or risk transfer tools.
When a derivative instrument significantly reduces financial risk by substantially offsetting changes in the cash flows (a cash flow hedge) or fair value (a fair value hedge) of an associated item that is eligible to be hedged (a hedgeable item), the hedge is considered effective, and hedge accounting should be applied.
For example, if a derivative qualifies as a cash flow hedge, a company can report the effective portion of the gain or loss on the derivative instrument as a component of other comprehensive income (loss), rather than on the income statement, and reclassify it into earnings in the same period or periods during which the hedged transaction affects earnings.