imported>Doug Williamson |
imported>Doug Williamson |
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| ''Risk management - hedging''. | | ''Law.'' |
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| A derivative instrument or contract is one whose value and other characteristics are derived from those of another asset or instrument (sometimes known as the Underlying Asset).
| | Primary legislation containing provisions that confer on appropriate officials or subordinate bodies the power to take certain actions, especially to create laws, regulations or orders. |
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| Derivative instruments are widely used by non-financial corporates for hedging purposes.
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| <span style="color:#4B0082">'''Example'''</span>
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| A share option is a type of derivative contract, allowing the holder to buy shares at a certain predetermined strike price.
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| The value of the share option derives from the current price of the related underlying share, relative to the option strike price.
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| For instance, say we hold a call option to buy shares at a strike price of $50, and the option is very close to its expiry date.
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| If the shares are trading at $90, our option to buy at $50 is valuable.
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| The option holder could exercise their option, paying $50 per share, and then sell the shares for $90 each, making a profit of $40 per share.
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| So the option itself is valuable.
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| We could sell the option for - roughly - $40 (per share).
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| On the other hand, if the share price were only $20, it wouldn't be rational to exercise an option to buy shares for $50.
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| It would be irrational to do that, because the shares are cheaper to buy in the market for $20 each.
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| Accordingly, the option isn't valuable at present.
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| The value of the option is being driven by - among other things - the share price.
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| == See also == | | == See also == |
| * [[Call option]] | | * [[Delegated legislation]] |
| * [[CCR]] | | * [[Statute]] |
| * [[Collateral]]
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| * [[Commodity risk]]
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| * [[CP]]
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| * [[Credit support annex]]
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| * [[Embedded derivative]]
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| * [[ETD]]
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| * [[Expiry date]]
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| * [[FC]]
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| * [[Fixing instrument]]
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| * [[Forward rate agreement]]
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| * [[Futures contract]]
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| * [[FVTOCI]]
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| * [[FVTPL]]
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| * [[Hedge fund]]
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| * [[Hedging]]
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| * [[Interest rate derivative]]
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| * [[Interest rate swap]]
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| * [[ISDA Master Agreement]]
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| * [[Leverage]]
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| * [[Margining]]
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| * [[Mark to market]]
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| * [[Maturity]]
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| * [[Notional principal]]
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| * [[Option]]
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| * [[Outright]]
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| * [[Potential Future Exposure]]
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| * [[Replacement cost]]
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| * [[Risk management]]
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| * [[Rogue trader]]
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| * [[Strike price]]
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| * [[Tracker fund]]
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| * [[Transfer]]
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| * [[Underlying]]
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| * [[Underlying asset]]
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| * [[Underlying price]]
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| * [[X-Value Adjustment]] (XVA)
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| ===Other links===
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| *[http://www.treasurers.org/node/8599 Masterclass: Derivatives, ''Sarah Boyce,'' The Treasurer]
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| [[Category:Manage_risks]] | | [[Category:Compliance_and_audit]] |
