imported>Doug Williamson |
imported>Doug Williamson |
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| ''Risk management - hedging''. | | 1. ''Financial performance measurement.'' |
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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).
| | The total book value of equity and debt, for the purpose of calculating accounting return on investment and similar performance measures. |
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| Derivative instruments are widely used by non-financial corporates for hedging purposes.
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| | 2. ''Investment risk.'' |
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| <span style="color:#4B0082">'''Example'''</span>
| | Amounts of investments made, and at risk of capital losses. |
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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]] | | * [[Accounting rate of return]] |
| * [[CCR]]
| | * [[Accounting return on investment]] |
| * [[Collateral]]
| | * [[Book value]] |
| * [[Commercial paper]] (CP)
| | * [[Capital]] |
| * [[Commodity risk]]
| | * [[Capital loss]] |
| * [[Credit support annex]]
| | * [[Debt]] |
| * [[Embedded derivative]]
| | * [[Equity]] |
| * [[ETD]]
| | * [[Initial coin offering]] |
| * [[Expiry date]]
| | * [[Performance]] |
| * [[FC]]
| | * [[Profitability]] |
| * [[Fixing instrument]]
| | * [[Return on investment]] |
| * [[Forward rate agreement]]
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| * [[Futures contract]] | |
| * [[FVTOCI]] | |
| * [[FVTPL]] | |
| * [[Hedge fund]] | |
| * [[Hedging]] | |
| * [[Interest rate derivative]] | |
| * [[Interest rate swap]] | |
| * [[ISDA Master Agreement]] | |
| * [[Leverage]] | |
| * [[Margining]] | |
| * [[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:Accounting,_tax_and_regulation]] |
| | [[Category:The_business_context]] |
| | [[Category:Corporate_finance]] |
| | [[Category:Investment]] |
| | [[Category:Long_term_funding]] |
| | [[Category:Identify_and_assess_risks]] |
| [[Category:Manage_risks]] | | [[Category:Manage_risks]] |
| | [[Category:Risk_frameworks]] |
| | [[Category:Risk_reporting]] |
| | [[Category:Financial_products_and_markets]] |
