The Risk Limited Glossary
Fair Value - in the pricing of financial instruments, the value determined by mathematical modeling of the instruments value.|
Also used as a defined term in U.S. accounting standards as fair value accounting and 'fair value hedges' as in FASB Statement FAS 133. A Fair Value Hedge is a hedge of the exposure to changes in the fair value of a recognized asset or liability, or of an unrecognized firm commitment, which are attributable to a particular risk.
Fallen Angel - a bond that was investment grade when issued, but has since degraded to junk quality.
FAS 133 - Financial Accounting Standard 133, Accounting for Derivative Instruments and Hedging Activities, Statement issued by the Financial Accounting Standards Board in June 1998 [the full text of FAS 133 is available here in PDF format]. FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. See also PIPE's (Private Investments in Public Equities) as a popular form of financing for growth or start-up operations, which may include embedded derivatives. A summary of FAS 133 is available on the Risk Limited website.
Since 1998 when FAS 133 was first issued, there has been an on-going evolution of the accounting rules for derivatives and physical energy supply contracts. This has included the issuance of FAS 138, FAS 149, and the various Derivatives Implementation Group (DIG) and Emerging Issues Task Force (EITF) rules subsequently adopted by the Financial Accounting Standards Board. See also Hedge Accounting.
FAS 138 - Financial Accounting Standard 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, Statement issued by the Financial Accounting Standards Board in June 2000 to amend FAS 133. The full text of FAS 138 is available here in PDF format.
FAS 149 - Financial Accounting Standard 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, Statement issued by the Financial Accounting Standards Board in April 2003 to further amend FAS 133. The full text of FAS 149 is available here in PDF format.
FASB - the Financial Accounting Standards Board, which is the designated organization in the U.S. private sector for establishing standards of financial accounting and reporting. The standards are officially recognized as authoritative by the U.S. Securities and Exchange Commission and the American Institute of Certified Public Accountants.
Fence - a long (short) underlying position together with a long (short) out-of-the-money put and a short (long) out-of-the-money call, with the options all having the same expiration date.
FCM - Futures Commission Merchant; an individual or organization accepting orders to buy or sell futures or futures options. A person or organization in this role needs to be certified by the Commodities Futures Trading Commission.
Firm Liquidated Damages - a contract that requires firm [certain] delivery of the specified commodity, or the payment of its equivalent financial value as damages for failure to perform.
Firm Power - electric power which is guaranteed by the supplier to be available at all times during a period covered by a commitment. That portion of a customer's energy load for which service is assured by the utility provider.
Floor - a type of derivative instrument that offers protection against declining prices, exchange rates or interest rates.
Financial Engineering - the field of applied finance devoted to the design and pricing of derivative instruments and structured products.
Foreign Currency Hedges - transactions entered into in order to eliminate or mitigate the financial risks of exposures to fluctuations in foreign exchange rates. In U.S. accounting terminology, derivative transactions meeting the criteria specified in Financial Accounting Standard 133. A detailed analysis of FAS 133 reporting for a foreign currency hedge transaction is available here. See also FAS 133 above.
Functional Currency - as terminology in U.S. accounting standards, the primary currency in which an entity conducts its operation and generates and expends cash.
Futures Contract - a transaction on a regulated futures exchange, such at the NYMEX or CBOT.
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