This chapter discusses the controls, measures, and accounting procedures used to manage risks in futures and options trading. It highlights three main risks: market risk, credit risk, and settlement risk. It emphasizes the importance of segregating responsibilities throughout the organization to manage conflicts of interest. The chapter outlines categories of risk measurement, segregation of trading, middle office, back office, and other functional responsibilities to ensure proper authorization and risk management.
I have given this presentation at the Amsterdam Business School, University of Amsterdam. It is a practical introduction for Master students in Financial Markets about the importance of Risk Management and the tools thereof.
I have given this presentation at the Amsterdam Business School, University of Amsterdam. It is a practical introduction for Master students in Financial Markets about the importance of Risk Management and the tools thereof.
Original air date: March 24, 2017
Rebroadcast and recording information at http://www.mhmcpa.com
Due to the recent increase in interest rates, along with the anticipated future increases in interest rates during 2017, many companies are looking to hedge their outstanding debt or future anticipated debt with interest rate swaps. These strategies are intended to fix the interest rate on the debt in to avoid future increases resulting from the market actions. Representatives from ABACUS Valuation and Risk Management Inc. will explore many of the hedging strategies employed when using interest rate swaps as well as some of the common pitfalls companies should look to avoid.
This presentation provides a highlight of the key issues in the management of Market Risk. It touches briefly some of the elements of the Basel 2 Accord with respect to Market Risk
Collapse of Long Term Capital Management Dipti Chauhan
This presentation is about the collapse of LTCM. We studied how the collapse happened , strategies used by LTCM, the counter parties involved and who suffered the most. The project also gives some important lessons we learnt from this collapse.
Original air date: March 24, 2017
Rebroadcast and recording information at http://www.mhmcpa.com
Due to the recent increase in interest rates, along with the anticipated future increases in interest rates during 2017, many companies are looking to hedge their outstanding debt or future anticipated debt with interest rate swaps. These strategies are intended to fix the interest rate on the debt in to avoid future increases resulting from the market actions. Representatives from ABACUS Valuation and Risk Management Inc. will explore many of the hedging strategies employed when using interest rate swaps as well as some of the common pitfalls companies should look to avoid.
This presentation provides a highlight of the key issues in the management of Market Risk. It touches briefly some of the elements of the Basel 2 Accord with respect to Market Risk
Collapse of Long Term Capital Management Dipti Chauhan
This presentation is about the collapse of LTCM. We studied how the collapse happened , strategies used by LTCM, the counter parties involved and who suffered the most. The project also gives some important lessons we learnt from this collapse.
An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. ETFs are the most popular type of exchange-traded product.
An ETF combines the valuation feature of a mutual fund or stock, which can be bought or sold at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be more or less than its net asset value. Closed-end funds are not considered to be ETFs, even though they are funds and are traded on an exchange.
Only authorized participants, which are large broker-dealers that have entered into agreements with the ETF's distributor, actually buy or sell shares of an ETF directly from or to the ETF, and then only in creation units, which are large blocks of tens of thousands of ETF shares, usually exchanged in-kind with baskets of the underlying securities. Authorized participants may wish to invest in the ETF shares for the long-term, but they usually act as market makers on the open market, using their ability to exchange creation units with their underlying securities to provide liquidity of the ETF shares and help ensure that their intraday market price approximates the net asset value of the underlying assets. Other investors, such as individuals using a retail broker, trade ETF shares on this secondary market
EMIR - European market infrastructure regulation has been initiated by European union to avoid situation similar to 2008-09. Financial scenario led Lehman to default and bear stearn near to collapse.
This helps EU regulatory bodies to monitor OTC, CCP and TRs.
1. The Business Model of Banking and how institutions will have to adapt themselves to the new regulatory environment
2. Investments in capital and human resources
3. Changes/improvements to the Banks’ technology capacity and structure
4. Business Profitability, Staff Compensation and Competitiveness
Presentation to Ukraine Commodity Market Development Conference
The author of the presentation: Christa Lachenmayr, Division of Market Oversight, CFTC (US)
"𝑩𝑬𝑮𝑼𝑵 𝑾𝑰𝑻𝑯 𝑻𝑱 𝑰𝑺 𝑯𝑨𝑳𝑭 𝑫𝑶𝑵𝑬"
𝐓𝐉 𝐂𝐨𝐦𝐬 (𝐓𝐉 𝐂𝐨𝐦𝐦𝐮𝐧𝐢𝐜𝐚𝐭𝐢𝐨𝐧𝐬) is a professional event agency that includes experts in the event-organizing market in Vietnam, Korea, and ASEAN countries. We provide unlimited types of events from Music concerts, Fan meetings, and Culture festivals to Corporate events, Internal company events, Golf tournaments, MICE events, and Exhibitions.
𝐓𝐉 𝐂𝐨𝐦𝐬 provides unlimited package services including such as Event organizing, Event planning, Event production, Manpower, PR marketing, Design 2D/3D, VIP protocols, Interpreter agency, etc.
Sports events - Golf competitions/billiards competitions/company sports events: dynamic and challenging
⭐ 𝐅𝐞𝐚𝐭𝐮𝐫𝐞𝐝 𝐩𝐫𝐨𝐣𝐞𝐜𝐭𝐬:
➢ 2024 BAEKHYUN [Lonsdaleite] IN HO CHI MINH
➢ SUPER JUNIOR-L.S.S. THE SHOW : Th3ee Guys in HO CHI MINH
➢FreenBecky 1st Fan Meeting in Vietnam
➢CHILDREN ART EXHIBITION 2024: BEYOND BARRIERS
➢ WOW K-Music Festival 2023
➢ Winner [CROSS] Tour in HCM
➢ Super Show 9 in HCM with Super Junior
➢ HCMC - Gyeongsangbuk-do Culture and Tourism Festival
➢ Korean Vietnam Partnership - Fair with LG
➢ Korean President visits Samsung Electronics R&D Center
➢ Vietnam Food Expo with Lotte Wellfood
"𝐄𝐯𝐞𝐫𝐲 𝐞𝐯𝐞𝐧𝐭 𝐢𝐬 𝐚 𝐬𝐭𝐨𝐫𝐲, 𝐚 𝐬𝐩𝐞𝐜𝐢𝐚𝐥 𝐣𝐨𝐮𝐫𝐧𝐞𝐲. 𝐖𝐞 𝐚𝐥𝐰𝐚𝐲𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞 𝐭𝐡𝐚𝐭 𝐬𝐡𝐨𝐫𝐭𝐥𝐲 𝐲𝐨𝐮 𝐰𝐢𝐥𝐥 𝐛𝐞 𝐚 𝐩𝐚𝐫𝐭 𝐨𝐟 𝐨𝐮𝐫 𝐬𝐭𝐨𝐫𝐢𝐞𝐬."
Affordable Stationery Printing Services in Jaipur | Navpack n PrintNavpack & Print
Looking for professional printing services in Jaipur? Navpack n Print offers high-quality and affordable stationery printing for all your business needs. Stand out with custom stationery designs and fast turnaround times. Contact us today for a quote!
Memorandum Of Association Constitution of Company.pptseri bangash
www.seribangash.com
A Memorandum of Association (MOA) is a legal document that outlines the fundamental principles and objectives upon which a company operates. It serves as the company's charter or constitution and defines the scope of its activities. Here's a detailed note on the MOA:
Contents of Memorandum of Association:
Name Clause: This clause states the name of the company, which should end with words like "Limited" or "Ltd." for a public limited company and "Private Limited" or "Pvt. Ltd." for a private limited company.
https://seribangash.com/article-of-association-is-legal-doc-of-company/
Registered Office Clause: It specifies the location where the company's registered office is situated. This office is where all official communications and notices are sent.
Objective Clause: This clause delineates the main objectives for which the company is formed. It's important to define these objectives clearly, as the company cannot undertake activities beyond those mentioned in this clause.
www.seribangash.com
Liability Clause: It outlines the extent of liability of the company's members. In the case of companies limited by shares, the liability of members is limited to the amount unpaid on their shares. For companies limited by guarantee, members' liability is limited to the amount they undertake to contribute if the company is wound up.
https://seribangash.com/promotors-is-person-conceived-formation-company/
Capital Clause: This clause specifies the authorized capital of the company, i.e., the maximum amount of share capital the company is authorized to issue. It also mentions the division of this capital into shares and their respective nominal value.
Association Clause: It simply states that the subscribers wish to form a company and agree to become members of it, in accordance with the terms of the MOA.
Importance of Memorandum of Association:
Legal Requirement: The MOA is a legal requirement for the formation of a company. It must be filed with the Registrar of Companies during the incorporation process.
Constitutional Document: It serves as the company's constitutional document, defining its scope, powers, and limitations.
Protection of Members: It protects the interests of the company's members by clearly defining the objectives and limiting their liability.
External Communication: It provides clarity to external parties, such as investors, creditors, and regulatory authorities, regarding the company's objectives and powers.
https://seribangash.com/difference-public-and-private-company-law/
Binding Authority: The company and its members are bound by the provisions of the MOA. Any action taken beyond its scope may be considered ultra vires (beyond the powers) of the company and therefore void.
Amendment of MOA:
While the MOA lays down the company's fundamental principles, it is not entirely immutable. It can be amended, but only under specific circumstances and in compliance with legal procedures. Amendments typically require shareholder
What is the TDS Return Filing Due Date for FY 2024-25.pdfseoforlegalpillers
It is crucial for the taxpayers to understand about the TDS Return Filing Due Date, so that they can fulfill your TDS obligations efficiently. Taxpayers can avoid penalties by sticking to the deadlines and by accurate filing of TDS. Timely filing of TDS will make sure about the availability of tax credits. You can also seek the professional guidance of experts like Legal Pillers for timely filing of the TDS Return.
Unveiling the Secrets How Does Generative AI Work.pdfSam H
At its core, generative artificial intelligence relies on the concept of generative models, which serve as engines that churn out entirely new data resembling their training data. It is like a sculptor who has studied so many forms found in nature and then uses this knowledge to create sculptures from his imagination that have never been seen before anywhere else. If taken to cyberspace, gans work almost the same way.
[Note: This is a partial preview. To download this presentation, visit:
https://www.oeconsulting.com.sg/training-presentations]
Sustainability has become an increasingly critical topic as the world recognizes the need to protect our planet and its resources for future generations. Sustainability means meeting our current needs without compromising the ability of future generations to meet theirs. It involves long-term planning and consideration of the consequences of our actions. The goal is to create strategies that ensure the long-term viability of People, Planet, and Profit.
Leading companies such as Nike, Toyota, and Siemens are prioritizing sustainable innovation in their business models, setting an example for others to follow. In this Sustainability training presentation, you will learn key concepts, principles, and practices of sustainability applicable across industries. This training aims to create awareness and educate employees, senior executives, consultants, and other key stakeholders, including investors, policymakers, and supply chain partners, on the importance and implementation of sustainability.
LEARNING OBJECTIVES
1. Develop a comprehensive understanding of the fundamental principles and concepts that form the foundation of sustainability within corporate environments.
2. Explore the sustainability implementation model, focusing on effective measures and reporting strategies to track and communicate sustainability efforts.
3. Identify and define best practices and critical success factors essential for achieving sustainability goals within organizations.
CONTENTS
1. Introduction and Key Concepts of Sustainability
2. Principles and Practices of Sustainability
3. Measures and Reporting in Sustainability
4. Sustainability Implementation & Best Practices
To download the complete presentation, visit: https://www.oeconsulting.com.sg/training-presentations
Discover the innovative and creative projects that highlight my journey throu...dylandmeas
Discover the innovative and creative projects that highlight my journey through Full Sail University. Below, you’ll find a collection of my work showcasing my skills and expertise in digital marketing, event planning, and media production.
Accpac to QuickBooks Conversion Navigating the Transition with Online Account...PaulBryant58
This article provides a comprehensive guide on how to
effectively manage the convert Accpac to QuickBooks , with a particular focus on utilizing online accounting services to streamline the process.
3.0 Project 2_ Developing My Brand Identity Kit.pptxtanyjahb
A personal brand exploration presentation summarizes an individual's unique qualities and goals, covering strengths, values, passions, and target audience. It helps individuals understand what makes them stand out, their desired image, and how they aim to achieve it.
Skye Residences | Extended Stay Residences Near Toronto Airportmarketingjdass
Experience unparalleled EXTENDED STAY and comfort at Skye Residences located just minutes from Toronto Airport. Discover sophisticated accommodations tailored for discerning travelers.
Website Link :
https://skyeresidences.com/
https://skyeresidences.com/about-us/
https://skyeresidences.com/gallery/
https://skyeresidences.com/rooms/
https://skyeresidences.com/near-by-attractions/
https://skyeresidences.com/commute/
https://skyeresidences.com/contact/
https://skyeresidences.com/queen-suite-with-sofa-bed/
https://skyeresidences.com/queen-suite-with-sofa-bed-and-balcony/
https://skyeresidences.com/queen-suite-with-sofa-bed-accessible/
https://skyeresidences.com/2-bedroom-deluxe-queen-suite-with-sofa-bed/
https://skyeresidences.com/2-bedroom-deluxe-king-queen-suite-with-sofa-bed/
https://skyeresidences.com/2-bedroom-deluxe-queen-suite-with-sofa-bed-accessible/
#Skye Residences Etobicoke, #Skye Residences Near Toronto Airport, #Skye Residences Toronto, #Skye Hotel Toronto, #Skye Hotel Near Toronto Airport, #Hotel Near Toronto Airport, #Near Toronto Airport Accommodation, #Suites Near Toronto Airport, #Etobicoke Suites Near Airport, #Hotel Near Toronto Pearson International Airport, #Toronto Airport Suite Rentals, #Pearson Airport Hotel Suites
India Orthopedic Devices Market: Unlocking Growth Secrets, Trends and Develop...Kumar Satyam
According to TechSci Research report, “India Orthopedic Devices Market -Industry Size, Share, Trends, Competition Forecast & Opportunities, 2030”, the India Orthopedic Devices Market stood at USD 1,280.54 Million in 2024 and is anticipated to grow with a CAGR of 7.84% in the forecast period, 2026-2030F. The India Orthopedic Devices Market is being driven by several factors. The most prominent ones include an increase in the elderly population, who are more prone to orthopedic conditions such as osteoporosis and arthritis. Moreover, the rise in sports injuries and road accidents are also contributing to the demand for orthopedic devices. Advances in technology and the introduction of innovative implants and prosthetics have further propelled the market growth. Additionally, government initiatives aimed at improving healthcare infrastructure and the increasing prevalence of lifestyle diseases have led to an upward trend in orthopedic surgeries, thereby fueling the market demand for these devices.
Putting the SPARK into Virtual Training.pptxCynthia Clay
This 60-minute webinar, sponsored by Adobe, was delivered for the Training Mag Network. It explored the five elements of SPARK: Storytelling, Purpose, Action, Relationships, and Kudos. Knowing how to tell a well-structured story is key to building long-term memory. Stating a clear purpose that doesn't take away from the discovery learning process is critical. Ensuring that people move from theory to practical application is imperative. Creating strong social learning is the key to commitment and engagement. Validating and affirming participants' comments is the way to create a positive learning environment.
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
Remote sensing and monitoring are changing the mining industry for the better. These are providing innovative solutions to long-standing challenges. Those related to exploration, extraction, and overall environmental management by mining technology companies Odisha. These technologies make use of satellite imaging, aerial photography and sensors to collect data that might be inaccessible or from hazardous locations. With the use of this technology, mining operations are becoming increasingly efficient. Let us gain more insight into the key aspects associated with remote sensing and monitoring when it comes to mining.
Cracking the Workplace Discipline Code Main.pptxWorkforce Group
Cultivating and maintaining discipline within teams is a critical differentiator for successful organisations.
Forward-thinking leaders and business managers understand the impact that discipline has on organisational success. A disciplined workforce operates with clarity, focus, and a shared understanding of expectations, ultimately driving better results, optimising productivity, and facilitating seamless collaboration.
Although discipline is not a one-size-fits-all approach, it can help create a work environment that encourages personal growth and accountability rather than solely relying on punitive measures.
In this deck, you will learn the significance of workplace discipline for organisational success. You’ll also learn
• Four (4) workplace discipline methods you should consider
• The best and most practical approach to implementing workplace discipline.
• Three (3) key tips to maintain a disciplined workplace.
5 Things You Need To Know Before Hiring a Videographer
Chapter 7 notes 2012 08 06
1. finlogIQ
Knowledge for financial IQ
STRICTLY PRIVATE AND CONFIDENTIAL
Chapter 7
Trading Risk Control and Management
August 2012
2. Chapter summary and outline
This chapter describes the controls, measures and accounting
procedures that are used to manage the risks involved in futures
and options trading, i.e. market risk, credit risk and settlement
risk. The chapter also highlights the importance of segregation of
responsibilities throughout the bank to manage potential conflicts
of interest.
Chapter outline:
• Categories of risks and measurement
• Segregation of responsibilities
• Accounting procedures
finlogIQ 2
3. Categories of Risks and Measurement
Three types of risks involved in trading
• Market risk
• Credit risks
• Settlement risks
finlogIQ 3
4. Market Risk
• Exposure to a change in value of some market variables, such as interest
rates, foreign exchange rates, equity, or commodity prices, is termed as
market risk.
• Limits that can be set to control the level of market risk
• Open contract limit
– Based on volatility of the contracts and estimated expected maximum loss
– More volatile contracts are therefore subject to a smaller open contract limit
• DV01 (dollar value per basis point)
– DV01 is a better measure of interest rates risk as it reflects the greater risks of
longer-dated exposures compared to shorter-dated ones.
• Value at Risk (VaR)
– Value at risk is widely used for risk measurement on a specific portfolio of
financial assets.
– Incorporates volatility & correlation => potential loss amount or value-at-risk.
– It measures the threshold value such that the probability that the mark-to-market
loss on the portfolio over the given time horizon exceeds this value.
– Setting a lower VaR, the portfolio size would need to be lowered as well or highly
correlated risks would have to be reduced.
finlogIQ 4
5. Market Risk - 2
• Total overall open contracts
– Total overall open contracts that can be held by one firm or entity should be
limited to a certain percentage of the Gross Open Interest
– Avoid potential liquidity problems
• Maximum loss limit is set for trader/trading group
− Weekly and monthly maximum losses
− Once loss limit triggered the trader/group will be suspended
• Maturity limit is set for trading purposes
– limit the possible losses that can arise as the result of poor liquidity
– Liquidity normally better for near-month contracts and worse for further months
– Further contracts normally have lower liquidity and are hence more volatile
– Under adverse conditions, difficult to unwind further month contracts
finlogIQ 5
6. Market Risk - 3
• Options carry multiple risk parameters
– Limits for Greeks, i.e. delta, gamma, vega, theta and rho.
• Delta limits are normally set in terms of USD or the local currency amount.
• Gamma is usually measured against a specified movement in the spot FX
rate of say, one standard deviation.
• Vega is the major trading risk in options and is usually measured by the
change in value of an option, i.e. the premium over a 1% change in market
volatility
• Theta, which measures the potential loss through time decay, is limited by
potential loss over a 1-day period.
• Gamma, vega and theta are sometimes controlled together by setting the
maximum loss for all three combined.
• Positive effects of theta are automatically offset against the negative effects
of gamma.
• Executing a FX swap transaction can reduce rho risks
finlogIQ 6
7. Credit Risk
• Exchange risk
– exchange and its associated clearing house is the counterparty to any exchange-
traded futures contract.
– Committed lines of credit from commercial banks, its own capitalization, and
mutual liability arrangements among the clearing members, it nevertheless has
to make good any contractual demands even if its counterparties fail.
• Clearing broker risk
– Margins must be maintained with the clearing broker, the credit risk arises from
the placement of such funds with the broker
• Counterparties’ credit risks
– Greater for OTC options and are set for individual counterparties.
– Limits are set according to the credit rating of the institution in terms of
settlement amount and contract tenor.
– Premium payment limits to avoid institutions from constructing a synthetic loan
through options
• Corporate institutions raise capital by selling deep in-the-money
options, covering the FX risk by forward purchase of the deliverable currency
and purchase of out-of-money options.
• Large premium paid upfront to the client would thus create a credit exposure
for the institution that purchases the option from the corporate client.
finlogIQ 7
8. Settlement Risk
• Primarily the domain of back office
• Timely and accurate confirmations of trades done by the traders are
essential to help ensure there is prompt settlement of transactions.
• OTC options
– confirmation should include details like the style of option, call currency and
amount, put currency and amount, expiry date and time, premium payment date,
settlement date and strike price.
finlogIQ 8
9. Segregation of Responsibilities
• Clear lines of reporting and segregation of responsibilities to avoid
situations where conflict of interest s may arise.
• The middle office (that controls and monitors risk limits) and the back office
(which reconciles payments with confirmations) should detect any limits
excess or breach of control procedures promptly to avoid financial disaster
Transaction Authorization
• Before any new instrument can be traded, it must first be approved
• Proper transaction authorisation or an approval process
• Trading Manager
– provide input on the market limits required consistent with his business
objectives and risk tolerance allowed.
– work closely with the middle office manager on risk limits, mark-to-market
process and other system requirements.
– trading in the exchanges and contracts to be traded.
– In the case of OTC options, the various limits like VaR and the Greeks are also
discussed.
finlogIQ 9
10. Segregation of Responsibilities - 2
Transaction Authorization(cont)
• Middle Office Manager
– Setting limits control, mark-to-market process, profit and loss reporting
– Certification of pricing tools to be used
• Operations Manager
– Necessary system support, confirmation procedures, settlement requirements,
and monitoring of brokerage fees according to the brokerage schedule after it
has been negotiated by the front office.
• Compliance Officer/ Legal Officer
– provide input with regards to local banking laws and regulations as well as those
of the country of incorporation of the bank.
• Finance Officer and Tax Officer
– accounting procedures for local tax and the tax authority requirements of the
country in which the local exchange is located.
finlogIQ 10
11. Segregation of Responsibilities - 3
Trading Manager’s Responsibilities
• Sets transaction and position limits, daily and monthly stop loss limits
– Ensures traders maintain continuous records of their positions throughout the day
• Ensure trade input should include the transaction date, settlement
date, contract type, number of contracts, delivery
month, price, exchange, broker, trader’s name and signature.
– Accounting hedges to be identified
• Daily review of trading activity
– reasonableness of pricing, unusual activity at month-end that has a material effect
on profit and loss, frequent cancellations/revisions and concentrated use of
specific brokers without good cause.
• Reconcile trading profit and loss reports
• Perform trading and unit management to ensure intended results are
achieved, and to review trading and hedging activities on a regular basis.
finlogIQ 11
12. Segregation of Responsibilities - 4
Back Office Responsibilities
• Consists of different operating units such as processing, accounting , and/or
internal audit, which may perform certain functions described below.
• Trading, processing, accounting, internal audit, and settlements/payments
functions.
• Review daily all trade tickets for completeness and proper approval prior to
input into the computer system of record.
– Tickets received after cut-off time should be recorded in a separate holdover log
and entered the following day (the actual trade date must be recorded in
system).
• Verify daily the accuracy of all future transactions
• Verify daily the accuracy of data provided by external brokers, exchanges
and clearing houses concerning open positions, money balances and net
equity
finlogIQ 12
13. Segregation of Responsibilities - 5
Back Office Responsibilities (cont..)
• Provide the information necessary to the Trading Manager to facilitate
effective management of the positions.
• Verify daily that outstanding positions have not exceeded authorised
positions and exchange limits.
• Prepare and pass daily the required general ledger accounting entries
regarding margin deposits, commission payments and other items.
• Monthly certifications of all outstanding futures contracts and fees paid
against all applicable general ledger accounts.
• Monitor all margin deposits
• Records:
– Accounting and/ or custodial records
– Local tax reporting purposes
– reports required by futures exchanges or other local regulatory bodies. If local
reporting requirements deviate from the accounting policies explained above,
parallel procedures should be adopted
finlogIQ 13
14. Accounting Procedures
• Essential to ensure proper management of risks
– Futures contracts are marked-to-market daily
– OTC options, independent sources of most recently available prices should be
used for daily mark-to-market purposes.
• Balance needed between flexibility, risk control and profitability.
– A flexible accounting system will expose the institution to a greater degree of risk
but will increase its profit potential.
• Mark-to-Market Accounting
– All futures contracts must be marked-to-market for accounting purposes.
– For hedges, they will be given the deferral accounting treatment.
• Gains or losses, including fees and commissions received or paid are
amortized as an adjustment to the interest account for the item being
hedged over its expected weighted average life and must be recorded as an
adjustment to its carrying value.
– hedges where correlation is not achieved, deferral accounting must be
terminated.
– Any trading gain or loss, recognized immediately
finlogIQ 14
15. Accounting Procedures - 2
Mark-to-Market Accounting (cont.)
• Where futures are used for hedging
– Underlying instrument that is being hedged can be identified and matched.
– Same accounting system must be applied to both the target security and the
hedge.
– Improper to use mark-to-market for one and we use accrual basis for the other.
• Uplifting a hedge must be explicitly.
– Prevent traders from using lousy positions as hedge and good positions as
trading.
– If the hedge is to reduce the overall risk position of existing assets and liabilities
or firm commitments or anticipated transactions;
– The items that are to be hedged must be identified, and
– The design of the hedge must be specified.
• Hedge management process ensures correlation between changes in the
value of the futures hedge(s) and the changes in the value of the hedged
item(s) is still achieved.
finlogIQ 15