Derivative is a financial instrument that derives its value from the value of some underlying asset. When the prices of commodities, currencies, securities, and interest rate are not fixed and keep on fluctuating, it becomes very necessary to hedge. Copy the link given below and paste it in new browser window to get more information on Derivatives and Hedging:- http://www.transtutors.com/homework-help/finance/derivaties-and-hedging.aspx

1. Derivatives

2. What are derivatives?
Derivative is a financial instrument that derives its value from the
value of some underlying asset. It has become increasingly important
and fundamental in effectively managing financial risk and creating
synthetic exposures to asset classes. Futures and options are the most
important contract types, and equity, treasury bills, commodities,
foreign exchange and real estate are the most important underlying
assets. Derivatives also allow transfer of risk from one party to another
like insurance. Derivatives can be classified into forward commitments
and contingent claims.

3. Types of derivatives
 Forward
 Futures
 Options
 Swaps

4. Purpose of derivatives
 It helps in price discovery
 It helps in risk management
 It helps in improving market efficiency of the
underlying asset
 It has low transaction cost than the underlying

5. What is Hedging?
Hedging is the process where we reduce or offset the probability of loss
from fluctuations in the prices of commodities, currencies, or securities.
Hedging is like insurance where we transfer risk. Hedging has many uses
it can be used in protecting one's capital against effects of inflation
through investing in high-yield financial instruments, real estate, or
precious metals. A gain or loss in the cash position due to changes in
price levels will be countered by changes in the value of a futures
position.

6. IAS 39
 AS 39 Financial Instruments: Recognition and
Measurement is an international accounting standard that
highlights the need for the recognition and measurement
of financial assets, financial liabilities, and some contracts
to buy or sell non-financial items
 IAS 39 was replaced by IFRS 9 Financial Instruments for
annual periods beginning on or after 1 January 2018
 The package of improvements introduced by IFRS 9
includes a logical model for classification and
measurement, a single, forward-looking ‘expected loss’
impairment model and a substantially-reformed approach
to hedge accounting

7. Cash flow hedge
A cash flow hedge is a strategy for eliminating or reducing the
exposure that arises from variations in the cash flows of a financial
asset or liability due to changes in a particular risk, such as interest
rate risk on a floating rate debt instrument. The hedging derivative
instrument is measured at fair value each period.
Natural hedge
A natural hedge is a strategy for decreasing financial risk that arises
from an institution’s normal operations. Natural hedge is done by
investing in two different financial instruments whose performance
tends to cancel each other out. A natural hedge does not require
the use of financial products such as forwards or derivatives.
However, most hedges are imperfect, and do not eliminate risk
completely.

8. Hey Friend,
This was just a summary on Derivatives and Hedging. For more detailed
information on this topic, please type the link given below or copy it from
the description of this PPT and open it in a new browser window.
www.transtutors.com/homework-help/finance/derivaties-and-hedging.aspx