[Anonymous]

(reposted from The Forum)
Derivatives and hedging (especially those problems with foreign currency) are difficult topics for most people. I understand the concepts but I often get the numerical problems wrong, no matter how many of them I do. I don’t know if there are some shortcuts to getting the problems right – I’ve tried to devise some of my own but I usually end up with the wrong answers. I’m using Roger at the moment. There are no TBS questions for Derivatives/hedging. I’m just wondering if I should skip this topic and move on because if it is not heavily tested, I don’t want to waste any more time on it.

[300]

This is the CPA exam not CFA so I wouldn't memorize the Black-Scholes equation or anything like that.

However, I think you should know the basics of options. Understand puts and calls, but don't stress over the difference betweeen straddles, strangles, collars, and so on. Have a basic understanding of futures contracts and how exhange traded instruments differ from bilateral forward contracts. Also swaps and how they can be used to hedge currency risk, for example.

[Anonymous]

@300 thank you very much. I know the concepts well enough I think. The journal entries involving Forward contracts can be confusing. Distinguishing between fair value hedge and cash flow hedge is often hard to do….I've seen some MCQs on that topic (choose which one of the choices is the best descriptor of a fair value hedge, for instance.) I have not heard about any SIMs on this topic – they probably stay away from it because a full problem on a cash flow hedge scenario would probably take longer than 15 minutes. Fingers crossed that I don't get more than 1-2 MCQs on this difficult topic.

[Anonymous]

This is actually a good article on the subject

Difference Between Fair Value Hedge and Cash Flow Hedge

[Author]

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