Definition of derivative instruments
Are derivative instruments specifically defined in the standards and if so, where?
A derivative instrument is a subset of financial instrument with mainly three characteristics, viz, its value changes in response to a change in the underlying variable, it requires no or low initial net investment and its settled on a future date. In the definition of financial asset, derivative instrument is covered under (c) (ii), viz, to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity. Purchased call options and put options and derivatives having a positive fair value are covered by this definition. Similarly in the definition of financial liability, the same is covered under (a) (ii), viz, to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity. Written call options and put options and derivatives having a negative fair value are covered by this definition. Certain derivatives like interest rate collar and interest rate reverse collars, credit default swaps, etc, oscillate between financial asset and financial liability depending upon the net fair value of the instrument.
