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 derivatives and hedging 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).
Learning Objectives
Upon successful completion of this course, participants will be able to:
Chapter 1
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
Chapter 2
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
Chapter 3
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
Chapter 4
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
Chapter 5
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
Major Topics
Introduction to Derivatives and Hedging
Forwards Futures
Swaps
Options
