Derivative instrument
1. (a)What are the derivative instruments that the company uses?
Overall utilization of derivative instruments by AirAsia is for both purposes of hedging and held for trading. For instance using certain derivative instrument to hedge a particular or contingent risk associated with a recognized asset and liability and highly probable forecast transaction.
Derivative instrument are recognized at fair value when parties are entered into contract and subsequently are measured at their fair value. Method of recognizing gain or loss is depends upon purpose of instrument used. The fair value of hedging derivative is classified as non-current asset when the hedge Item is more than 12 month and also as current asset or liability when the maturity of hedge item is less than 12 month.
Air Asia manages its cash flow interest rate by entering into a number of immediate interest rate swaps and cross currency swaps contracts which converts its existing long-term floating rate debt into fixed rate debts. The rationale is that the hedging strategy ensures company is paying a fix interest rate expense on its liability and performance of Air Asia is not affected by fluctuation in interest rate. In addition company can plan better for all its activities.
Credit risk is the risk of financial loss if business counterparty defaults and fails to meet its collateral obligation. Credit risk is controlled by application of derivative financial instrument with placement and transaction with major financial institution and reputable parties.
There are several derivative instruments listed in balance sheet:
Interest rate swaps: “is an agreement between two parties in which one stream of future interest payment is exchanged for another based on specified principal amount. It often used to exchange a fixed payment for a floating payment. Companies use interest rate swaps to limit or manage exposure to fluctuation interest rate.”
Interest rate caps: “is series of European call
Overall utilization of derivative instruments by AirAsia is for both purposes of hedging and held for trading. For instance using certain derivative instrument to hedge a particular or contingent risk associated with a recognized asset and liability and highly probable forecast transaction.
Derivative instrument are recognized at fair value when parties are entered into contract and subsequently are measured at their fair value. Method of recognizing gain or loss is depends upon purpose of instrument used. The fair value of hedging derivative is classified as non-current asset when the hedge Item is more than 12 month and also as current asset or liability when the maturity of hedge item is less than 12 month.
Air Asia manages its cash flow interest rate by entering into a number of immediate interest rate swaps and cross currency swaps contracts which converts its existing long-term floating rate debt into fixed rate debts. The rationale is that the hedging strategy ensures company is paying a fix interest rate expense on its liability and performance of Air Asia is not affected by fluctuation in interest rate. In addition company can plan better for all its activities.
Credit risk is the risk of financial loss if business counterparty defaults and fails to meet its collateral obligation. Credit risk is controlled by application of derivative financial instrument with placement and transaction with major financial institution and reputable parties.
There are several derivative instruments listed in balance sheet:
Interest rate swaps: “is an agreement between two parties in which one stream of future interest payment is exchanged for another based on specified principal amount. It often used to exchange a fixed payment for a floating payment. Companies use interest rate swaps to limit or manage exposure to fluctuation interest rate.”
Interest rate caps: “is series of European call