The Effect of Derivatives Usage on Firm Value and Performance

Hedging is a significant measure of financial risk management. Since the 1970s, the increasing number of powerful companies started to control the risk of the exchange rate, the interest rate and commodity by using financial derivatives. ISDA (2013) based on the Global 500 Annual Report 2012 survey found that 88 percent of companies use foreign exchange derivatives. Modigliani & Miller (1958) believed that if the financial markets were under perfect conditions, for instance, there was no agency costs, asymmetric information, taxes and transaction costs, hedging would not increase the company 's value because investors can hedge by themselves. However, a large number of practical studies have shown that hedging is beneficial

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

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

Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or other underlying notional amounts. Derivatives are carried at fair value on the consolidated balance sheets in derivative assets or derivative liabilities. We elect to present any derivatives subject to master netting provisions as a gross asset or liability and gross of collateral. Disclosures regarding balance sheet presentation of derivatives subject to master netting agreements are discussed in Note 3 – Derivative Instruments. We may designate derivatives as cash flow or fair value hedges.

Greater standardisation of OTC derivatives contracts: Greater standardisation would enhance the efficiency of operational processes; facilitate the increased use of central counterparty (CCP) clearing and trading on organised trading platform to support greater comparability of trade information. By working with international regulators and the industry to take steps in identifying and agreeing which products can be further standardised, both in terms of underlying contract terms and operational processes where this must be implemented on a timely basis.

Malaysia’s macroeconomic fundamentals remain strong as Gross Domestic Product (GDP) for the second quarter come in at 5.8% following a 5.6% expansion in the first quarter. Consequently, various economists have upgraded their full year GDP forecast for Malaysia to 5.2%-5.5% while the government estimate 4.3%-4.8%. Meanwhile, inflation continues to moderate to 3.2% in July after peaking at 5.1% in March. Bank Negara Malaysia (BNM) is expected to keep the Overnight Policy Rate unchanged at 3.00% for the rest of 2017. Ringgit Malaysia (RM) has established at c.4.30 to the US Dollar despite a sizeable government bond maturity during the month. Takaful Ikhlas expect the market to trade sideways despite the external headwinds from geopolitics and central banks normalisation plans as well as the net foreign outflows recorded in August for Bursa (June: +RM359m, July: +RM419m, August: -RM241m). Second quarter earnings were non-inspiring but we are hopeful that the 2H17 results will recover. Although Takaful Ikhlas expect that the markets to trade sideways, various key themes still present the good opportunity for returns. They

In 1984, Financial Accounting Standards no. 80, Accounting for Futures Contracts, also known as FAS 80 had become effective. This document included all hedge accounting practices for entities in the United States. But FAS 80 had several faults. One of its faults was that it was bounded to exchange-traded futures and options and not to over the counter (OTC) derivatives. In 1999, FAS 80 was replaced by Financial Accounting Standards no.133, Accounting for derivative instruments and hedging activities. Despite, the numerous amendments, clarifications and interpretations this document had over the years, it still remains at the core of current derivatives accounting practices. This essay tends to provide a definition of a derivative, its characteristics

These are the divisions in Barclays that handle markets and involved in trading of stocks, bonds, commodities, forex, interest rates and market indexes. Trading in derivatives is commonly employed by Barclays to hedge risks but we will see that the fund managers in the last decades exposed the bank to risks by indulging in huge speculative investments. Let us investigate a few financial principles now.

It is estimated that about 75% of American companies use derivatives. The main risk remains that most companies do not monitor their position frequently (Operational) and only few really understand the instruments (Intellectual). Moreover, as an off-balance-sheet item it reduces the public awareness of such items (accounting).

There is a need of more innovation in Derivative Market because in today scenario even educated people also fear for investing in Derivative Market because of high risk involved in Derivatives.Derivative Type:

Financial derivatives provide banks with an effective way to manage interest rate risk without incurring additional capital charges. Derivatives can be used to hedge asset and liability positions by allowing banks to take a position in the derivatives market that is equal and opposite to a current or planned future position in the spot or cash market. Therefore, regardless of the movement in prices, losses in one market will be offset by gains in the other. Banks can also take a derivative position uncovered by potential earnings or losses. In this case they are speculating on interest rate changes that the market doesn’t anticipate.

Derivatives which are essentially just bets (on virtually anything: price of commodity, exchange rate, inflation, currency exchange, etc.) have become a huge market worth over $700 trillion. The problem with them is that there is no physical value behind them and if things go wrong one have to face loss of all the money that have been invested.

2011 was a momentous year for a number of reasons. The ‘Arab Spring’ uprisings in the Middle East and North Africa and the earthquake and tsunami in Japan in the first half of the year, coupled with concerns around the US economic recovery, all had a profound effect on the global social, political and economic landscape. More directly affecting Mondi’s trading environment, the second half of the year was dominated by the ongoing macroeconomic challenges affecting the Eurozone and the wider European Union, with the threat of sovereign default and the break-up of the Eurozone creating widespread uncertainty in many of the countries in which they operate.

Brooks (2014) states that in 2008, the entire Southeast Asian economy received roughly less than half as much foreign direct investment as China did. Four years later, they pulled to within spitting distance. Why is there a sudden surge of international interest in this particular region? It is because ASEAN’s five core countries- Indonesia, Malaysia, Philippines, Singapore and Thailand- have been growing faster than any other regional grouping in the world over the past 5 years, with Philippines standing out in particular because of its’ impressive 6.6% economic growth rate as of 2012. The Philippines is now one of the fastest-growing economies in Southeast Asia, going from a developing market to what is considered now as an emerging market in a global scale because of the competency of trade in the Philippines.