Derivative Financial Instruments Employed For Risk Management

FTSE Bursa Malaysia KLCI Futures (FKLI) is a capitalisation-weighted stock market index, composed of the 30 largest companies on the Bursa Malaysia by market capitalisation. Bursa Malaysia Derivatives (BMD) offers 3 categories of derivatives which are Commodity Derivatives, Equity Derivatives and Financial Derivatives. In our case study, KLCI May futures contract is under the equity derivatives.

The presentation was scheduled for the first week of December 1990. Mr. Pross outlined the use of various derivatives, noting that they differed widely in their ability to reduce risk. If the company was, say, placing a large bid to buy a building abroad, one might prefer to use foreign currency options to hedge the currency risk in the event the deal fell through. He argued, however, that foreign currency futures were best suited to hedge the fluctuations in revenues arising from currency movements. Mr. Pross proposed a plan to hedge currency risk using futures which

* Unrealized loss/gain on derivative instruments Operating derivatives is not a core activity of the company. (These are used to hedge and diminish potential risks)

Derivative contracts were either negotiated with specific counterparties (over-the-counter) or were standardized contracts executed and traded on an exchange. Negotiated over-the-counter derivatives were comprised of forwards, swaps, and specialized options contracts. Over the counter derivatives can be tailored to meet the customers’ needs with respect to time and quantity and they are not traded in an organized exchange. On the other hand, standardized exchange-traded derivatives consisted of futures and options contracts. Even though over-the-counter derivatives were usually not traded like securities in an exchange, they might be terminated or assigned to an alternative counterparty. Standardized derivatives trade on an exchange and have time and quantity that are fixed.

Analyze the derivatives market and determine the use of derivatives to efficiently manage investment risks in an investment portfolio.

Discuss the implications of this changing market for other vested parties in the Australian bond market, namely for:

Derivatives are recognized on the balance sheet at fair value, while potential gains or losses linked to these financial instruments are classified as reserve in equity. The fact that the profit or losses deriving from the derivatives are not recognized in “real time” in the financials mean that there is a temporary

3. Assume the same facts as in 2 above, but that OTT has not yet determined whether an impairment exists or the amount of any possible impairment. For March Madness Incorporated, would OTT still conclude that the investment is other-than-temporarily impaired, and would the impairment charge as of December 31, 20X1, be different if the stock price at issuance of the financial statements (i.e., as of January 31, 20X2) was $95 and not $75?

their series of transactions will enter in a CCP for OTC markets. There is an uncertain risk that the buyer will default on such transaction. There is also a big risk that the seller of a derivative is not selling in good faith as underlying assets came from complex structures that could clash losses against each other. For these cases, it is better to have a CCP framework in place to strengthen the gaps and circumstances that each parties can take opportunities out of technical aspects such as collaterals, rates and margins. Since CCP intends to regulate such OTC markets by giving enough criteria for trades to take place; collateral management and margining are now surfacing into the picture. These items will set boundaries and reduce counterparty risk, placing trades into an exchange, reducing margins during the process, and simplify the approach for trades. The results of regulation will further define specific rules like types of collaterals to be accepted, risk models, and certain policies on cash collateral, etc. Margins will also play part of regulating the actual initial and variation margins, which affects the movement of mark-to-markets that will improve control on sudden hike of trades at once. So now overall, CCP can help manage and control counterparty risks, prevent derivatives especially OTCs to have over or under collateralization and with a sense of marginal controls to prevent suspicious and abusive transactions to take place on security markets that are not so much regulated by

Even though this change will cause an increase in the volatility of profit and loss, it is likely to reduce risky investments in derivatives and increase accountability among managers and accountants. Treating some derivatives as off-balance sheet derivatives has in the past caused some managers and accountants not to display some derivative trading activities, especially if they are faced with high speculative risks. Highly risky investments cause a business to collapse. One example of a failed company due to risky investments is Barings Bank which collapsed due to highly risky derivative trading. The company’s manager of the Singapore branch engaged in highly risky derivative trading and kept them off balance sheet, and manipulating the accounts to show positive profits (Reserve Bank of Australia, 1995). However, the reality was that the company was making losses. The company

Yet, the shortcomings of MiFID became evident during the financial crisis of 2008. To improve these weaknesses inherent in the MiFID structure, MiFID II was introduced to increase transparency in the system. While MiFID was focused on opening up markets to greater competition, MiFID II seeks to improve the business practices, and bring trading activities on to a transparent and organised trading venue. In doing so, MiFID II seeks to directly address major shortcomings that precipitated during the financial crisis, such as opacity in derivatives and other over-the-counter markets.

b) Margin requirements- the purpose of this is to pay for the percentage of marginable securities that an investor must pay. London did not fully understood Mr. Leeson's operations. It was hard to go to one supervisor and get an accurate assessment of the Singapore operations. Mr. Leeson reported to four different individuals: the head of financial products, the regional manager of Barings Asia, an immediate supervisor in Singapore, and one in Tokyo.

Futures and options contracts are the two exchange-traded derivatives contracts in the financial market that can be used to manage Alkane’s risks.

There are many different types of derivative instruments that can be used in financial markets. This paper will examine the various different types of futures contracts, (futures) that are available to be purchased in the marketplace. It will be shown what role they play in managing risk with multinational companies, portfolio managers, and institutional investors alike. It will also be touched on about how speculators can find opportunities for financial gain with the use of futures.

Among the most fundamental risks, associated with exchange-traded derivatives, is variable degree of risk. According to Ernst, Koziol, & Schweizer (2011), the transactions in