A derivative is a financial product that derives its value based on an underlying asset, liability, or other variable (such as an interest rate, foreign currency, or commodity price). Derivatives have become very popular tools for 'hedging' (i.e. reducing) financial risk; they have also become an increasingly standard item on big companies' balance sheets. Yet understanding how they work, what they are used for, and how they can affect the bottom line of a business has proven to be a significant challenge for the accounting and auditing industries.
This course provides an 'accountant-friendly' overview of financial risk management and derivative instruments. This overview focuses on the various types of risk that impact financial markets today, as well as the four major categories of derivatives commonly used to hedge these risks (i.e. forwards, futures, swaps, and options).
Upon successful completion of this course, participants will be able to:
- Recognize the various types of risk that impact financial markets, noting defining characteristics and examples
- Identify proper financial risk management practices
- Cite examples of tools used to manage financial risk, noting the basic types of derivative instruments and their usage
- Cite examples of forward contracts, noting their unique characteristics
- Identify appropriate hedging practices using forward contracts
- Calculate the payoff from a forward contract
- Calculate forward prices, noting the effects of arbitrage on forward pricing
- Identify a futures contract, noting the difference between a futures contract and a forwards contract and the risks associated with each
- Cite the mechanics of futures exchanges, noting applicable terminology and examples of futures orders
- Calculate futures daily margin requirements
- Identify the financial and operational risks associated with using futures contracts as hedging tools
- Identify the various types of swap agreements, noting the unique characteristics and mechanics of each
- Calculate swap settlement amounts
- Identify appropriate hedging practices using swaps
- Cite examples of option contracts, noting defining characteristics and key differences with other derivative products
- Identify appropriate hedging practices using option contracts
- Calculate the payoff from an option contract
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