Ias 39 And Its Effects On Risk Management

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Abstract

Organizations are prone to various risk such as interest rate risk, Forex risk, price risk, credit risk etc, which results in income volatility. Companies seek to cover these risks by using derivatives. Derivatives are financial instruments that derive their value overtime from the performance of an underlying asset. This strategy of using derivatives to mitigate risk is known as 'Hedging '. The use of derivatives has increased over a period of time due to which the thirst for accounting was aroused. International Accounting Standard 139 was referred as an accounting revolution which made an effort to bring about 'Accounting for Derivatives '. The objective of IAS 39 was to lay down the rules for presenting derivatives in the
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Derivatives:

A Derivative is a financial instrument which derives its value from the value of another asset, known as 'underlying asset ', which could be a share, an interest rate, a commodity or a currency.

Derivatives are contracts to buy or sell the underlying asset at a pre set price, quantity on a future date. Derivatives are very similar to insurance; they protect companies against market risk such as interest rate risk, forex risk, credit risk, price risk etc.

Derivatives emerged as a 'hedging ' device against the fluctuation in prices of commodities & financial instruments. Derivatives can be used in two ways, one to mitigate economic loss, i.e. 'Hedging ' & the other to increase the profit of underlying asset, if the value of asset moves in the direction of investor 's expectation .i.e. 'Speculation. '

Derivatives consists of two components namely,

· Underlying Asset: Underlying asset is the financial instrument on which a derivative 's price is based.

· Notional value: Notional value is the total value of hedged position.

Types of Derivatives:

· Forwards.

· Futures.

· Options.

· Warrants.

· Swaps.

· Swaptions.

Hedging:

Hedging is a risk reduction technique where by an entity uses derivatives to offset future changes in the fair value or the cash flow
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