The Counter Derivatives : Hedging Or Creating Risk?

Mr. Brown readily admitted that he was not at ease discussing the most recent approaches to risk reduction or hedging. He had received his MBA from Harvard in the 1960s and had spent most of his career working for a company that had little international exposure. Moreover, he was not familiar with derivatives such as currency options, which until recently were not widely traded. However, Mr. Brown had recently hired an assistant, Mr. Dan Pross, who had some knowledge of hedging and derivatives. As a student at UCLA, Mr. Pross had traded various types of derivatives for his own portfolio and was familiar with how they were traded. Although Mr. Pross did not have a finance background, he was, in Mr. Brown’s opinion, extremely intelligent and highly capable. Mr. Brown suggested that Mr. Pross make a presentation to the senior management on the use of derivatives to reduce risk.

“Over-the-counter derivatives will be required to be traded on regulated exchanges, and the trades will have to be submitted to regulated clearinghouses” (First Data Corporation, 2010). The clearinghouses must also submit proposals to the regulators before accepting swaps for clearing. Regulators will have the authority to impose capital, margin, reporting, record-keeping and code of conduct requirements on swap dealers and participants to ensure there are adequate financial resources to meet their responsibilities (First Data Corporation, 2010).

Management’s assessment of risk associated with interest rates is high. Exposure to market risks results primarily from fluctuations in interest rates. Their objective is to enter into derivative instruments to primarily decrease volatility of net earnings and cash flow associated with fluctuations in interest rates. They have financial instruments that are sensitive to changes in interest rate, as well as several outstanding interest rate swap agreements.

The bank uses derivatives such as wholesale, funding, other capital market alternatives, and product pricing strategies to manage their interest rate risk (TD 2014, 87).

Financial instruments such as derivatives and available-for-sale are measured and recognized at fair value method. The most common derivatives include forward contracts as an agreement to sell or to buy an asset at a fixed price in the future. Accordance with AASB 139, available-for-sale are those non-derivative that are designated for sale or that are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. Those financial instruments are initially recognized at their transaction price on market whose identical items (active market). Regarding unavailability active markets, management will perform their judgement and estimation to determine the fair value.

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

As noted in section 17, Air Canada uses derivative instruments to provide economic hedges to mitigate certain risks. The valuation include all factors which will be considered in setting a price, such as Air Canada’s and the counterpart’s respective credit risks.

make sports bets like this so it should come as no surprise that derivatives are so popular since many of the same people who work in Wall Street are betting at sports books.

The real readers for Muhtaseb’s article align very well with his intended readers because of the location of the publication in the Journal of Derivatives and Hedge Funds which caters to financially savvy and hedge fund interested readers. In the second sentence of the abstract, Muhtaseb already begins to reference technical financial terms that his intended reader should understand. When elaborating on how his purpose is achieved, he says, “It is accomplished through identification and analysis of numerous activities normally associated with hedge funds that have become an integral part of capital market activities” (1). Even in the abstract when Muhtaseb attempts to summarize his argument in approachable and concise terms, he uses the phrase ‘capital market activities.’ The intended audience reading in the Journal of Derivatives and Hedge Funds would recognize capital markets as markets for buying and selling debt and equity instruments, but because I am not part of the intended audience for article, I rely on google searches to fill the gaps in my understanding. Because Muhtaseb published his article in a technical journal, though, his real readers are likely

The forward and money-market hedges are discussed in detail below. At this point, it is sufficient to acknowledge that these financial contracts do mitigate the risk. Other suggested contracts are beyond the scope of this case, but should be acknowledged.

iv) Swap - a derivative with a profit and loss profile of a futures contract

Today, an increasing number of risky bond options have been introduced to customers, but only a few customers can understand how to price a risky bond option. The credit derivative is a new type of financial derivative which is based on the credit condition of the loan developed in the 1990s, and its function is to separate the credit risk from other risks of the primary assets and transfer it to the counterparty. Also, credit derivatives can make credit risk appear in a more fluid and tradable form, which has a great application in improving the portfolio of returns and presenting a highly structured risk portfolio. Meanwhile, credit derivatives can be used in the investment market Avoid risks, and thus mobilize the credit market activity.

Derivatives are financial instruments based on other products, whether physical or financial. The other products may themselves be derivative. Three main forms of derivative exist futures, options and

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

In the year of 2001, the derivative products of equity of Pakistan were started in the Stock Exchange of Karachi. In the start of this launching, a single stock of futures was brought for introduction which was deliverable for just one month. It has almost nine years passed after that but this stock market is not considered as much as developed when it is compared to Indian market. The derivates related to finance, and which were traded in terms of exchange were initially started in Bombay Stock market and National Stock Market of India in the year of 2000’s June. Some of the futures related to index which were based on BSE Sensitive Index (Sensex) and S&P CNX Nifty Index (Nifty) were started in very first phase.