In 1984, Financial Accounting Standards no. 80, Accounting for Futures Contracts, also known as FAS 80 had become effective. This document included all hedge accounting practices for entities in the United States. But FAS 80 had several faults. One of its faults was that it was bounded to exchange-traded futures and options and not to over the counter (OTC) derivatives. In 1999, FAS 80 was replaced by Financial Accounting Standards no.133, Accounting for derivative instruments and hedging activities. Despite, the numerous amendments, clarifications and interpretations this document had over the years, it still remains at the core of current derivatives accounting practices. This essay tends to provide a definition of a derivative, its characteristics
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The key distinguishing features of derivatives are: 1. Settlement in cash or equivalents – a derivative will be settled at a future date with an exchange of cash or assets that are easily convertible to cash (such as marketable securities)

2. Underlying price and Notional amount – the total value of the derivatives will be calculated by multiplying the index by a specific number of units specified in the contract, which is known as the notional amount (units, bushels, pounds). The value of the derivative will be based on some variable, such as a price index, which is known as the underlying (specified price, interest rate, exchange rate).

3. No net investment – at the time the derivative contract is entered into, there will be no payment by either side in most cases. Payment occurs at the time of settlement only. In the case of options-based derivatives, the party that is acquiring the option normally pays a premium, but this is still considered to be no net investment as long as the payment is less than the cost of acquiring the underlying.

There are several types of derivative contracts. Three of the most common types are forwards, futures and

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