Accounting/Finance - derivatives?

Question

Can anyone give an example of a derivative instrument you use in your workplace. If you don’t have one in use now, can you think of an area where some risk could be mitigated by using a derivative?

Answer 1

Why Use Derivatives?

There are two main reasons for the use of derivatives within a risk management program:

1. High and variable levels of market volatility. These conditions have existed since the mid 1970's.
2. Limited ability to adequately manage risk exposure by just using policy decisions and cash market transactions.

Exchange Traded vs. Over-The-Counter (OTC)

There are two main forums within which derivatives trade - organized exchanges and over-the-counter (OTC). They are similar in many respects, but do have important distinguishing features.

Derivatives, like most tools, are neutral until utilized. It is with utilization that positive and negative attributes can identified. The main utilization issue related to the use of derivatives is the use to which management is applying derivative strategies - hedging or speculating. Hedging is generally perceived to be good and speculating is generally perceived to be bad.

Pls click on the 1st link for the full, excellent article on why use derivatives.

What trends do you expect to see in the use of equity derivatives in 2000?
The main trend will be an even broader base of participants engaging in equity derivatives. For example, corporates are increasingly implementing equity-based incentive schemes and managing their risks with share repurchase programmes using derivatives. And pension fund managers are involving derivatives as a management tool for tactical asset allocation or portfolio enhancement and protection. This is helping create a more stabilised, mature and liquid derivatives market. (2nd link)

Financial derivatives come in many shapes and forms, including futures, forwards, swaps, options, structured debt obligations and deposits, and various combinations thereof. Some are traded on organized exchanges, whereas others are privately negotiated transactions. Derivatives have become an integral part of the financial markets because they can serve several economic functions. Derivatives can be used to reduce business risks, expand product offerings to customers, trade for profit, manage capital and funding costs, and alter the risk-reward profile of a particular item or an entire balance sheet.

Answer 2

In finance, a spinoff is a secure practices whose value relies upon upon or derived from extra than a number of underlying sources. The spinoff itself is completely a settlement between 2 or extra events. Its fee is set by way of fluctuations in the underlying asset. the main effortless underlying sources incorporate shares, bonds, commodities, currencies, costs of pastime and industry indexes. maximum derivatives are characterised by way of extreme leverage. Futures contracts, forward contracts, concepts and swaps are the main effortless varieties of derivatives. because of the fact derivatives are only contracts, almost something may well be used as an underlying asset. There are even derivatives in line with climate archives, such because of the fact the quantity of rain or the type of sunny days in a particular region. Derivatives are well-known to hedge possibility, yet can be used for speculative applications. as an occasion, a ecu investor procuring shares of an American company off of an American replace (utilising American funds to take action) could be uncovered to change-value possibility whilst preserving that inventory. To hedge this possibility, the investor ought to purchase distant places funds futures to fasten in a distinctive replace value for the destiny inventory sale and distant places funds conversion back into euros. replace value and pastime value hazards are controlled with a type of ordinary concepts, which incorporate journey investment and selective use of derivatives. We use derivatives to mitigate or get rid of specific financial and industry hazards because of the fact we habit company in distinctive markets world huge and native investment isn't continuously useful. besides, we use derivatives to adjust the debt we are issuing to verify the fixed or floating nature of the sources we are determining to purchase. We observe strict rules to administration each and every of those hazards, which incorporate prohibitions on derivatives determining to purchase and merchandising, derivatives industry-making or different speculative events. The notes AICPA's effortless experience questions on Derivatives is beneficial examining (third link)

Answer 3

I stay away from derv's.

I think it was Long Beach, Calif.,
who, a decade ago, bought
millions of dollars worth and
in 6 mo., literally bankrupted the county; first time in history that
occurred.

Derv. are as far from being safe investments as slot machine playing is.