Controlling derivatives

Article Abstract:

Derivatives are financial instruments that are valued on the basis of the movement of underlying variables such as time, volatilities, indices, commodities prices, securities prices, interest rates and exchange rates. Such derivatives are often structured so that they have high gearing and potential gains or losses that may be fairly large. Derivatives can be simple and straightforward, as in the case of forward foreign exchange, commodity purchases and options, or a complex blend of transactions, as is the case with swaptions, cylinders, collars and range forwards. With their widespread use as hedging instruments, derivatives have become a major source of concern among finance officers, particularly since the much-publicized derivatives trading losses of Barings and Procter and Gamble. A series of useful tips for the management and control of derivatives taken from a new Touche Ross handbook are presented.

Accounting and auditing, Derivatives (Financial instruments)

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Don't wait for Maggie, she'll take too long

Article Abstract:

Margaret Thatcher opposes UK membership in the European Monetary System (EMS), but UK businesses can currently benefit from the EMS by using the European Economic Unit (ECU) to invoice transactions. The ECU is a unit derived from an underlying market basket of currencies that has no worth independent of its components. Businesses can use the ECU as a proxy currency, either as a netting currency or for borrowing and translation hedging. Invoicing and managing translation exposure in ECUs reduces risk by decreasing the exposure to exchange rate fluctuations. ECUs also decreases dealing costs when settling intercompany balances by simplifying the settlement procedure.

United Kingdom, Economic policy, Euro (Currency), European Monetary System, Thatcher, Margaret, Great Britain, European Community

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Managing foreign exchange: keep it simple

Article Abstract:

The complexities of foreign exchange force companies to try and simplify their foreign exchange processing. A graph can be used to highlight where risks are and to show the cash flow in each currency. The effect of taxes on the foreign exposure needs to be measured. The exposure can be eliminated without needing to undertake further transactions by using a natural hedging technique that changes the financial structure of the business.

Risk assessment, Foreign exchange

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