Derivatives and Hedging: Topic 815
Marietta Poshi

Derivatives have been around for thousands of years. They are the instruments that are attributed to trade development around the world. What was initiated as a promise in trade to payback, has evolved into global trade with exclusive contracts that are enforceable in a court of law. Derivatives have emerged as an investing tool in the financial world even more aggressively the past 25 years. The banks and bankers are seen as the fundamental players of derivatives and hedging. While derivatives have some positive aspects to them, they get a lot of negative feedback due to their risky nature. The impact of the financial crisis in 2008 was felt around the world and derivatives were at the center of it. One consensus reached across all involved parties was that in order to avoid what could be a very impactful crash in the future of the financial world, there is a need for stricter and internationally imposed regulations. Too many regulations inhibit the financial environment and hinder its ability to expand. On the other hand, loose regulations are left up for interpretation and have been abused in the past for financial gain while the actions taken as a result have impact the economy of the world. It is essential to find the right balance of regulations where financial institutions are held responsible for their actions but also allow the ability to participate freely in trade as this is essential for business continuity, growth, and expansions. One way to achieve this, is to have an established benchmark rate for trading across the world and that has been a challenge which has been argued back and forth for quite some time. Derivatives and hedging attempt to balance the risk involved with investments that are not regulated by the SEC. The return on investments is usually large as is the risk involved with them. The LIBOR has gotten a lot of attention in regards to being the optimal benchmark rate or not this past decade. This research paper, through the support of current literature and information collected from surveys supports the options for the optimal benchmark rate for hedge accounting purposes. From the responses collected from the survey and findings in current literature and publications there is evidence that there should be more than 2 benchmark rates used in derivatives and hedging. Interest rates should always be disclosed in financial statement and changes in rates should also indicate how they impact prior financial reports.

Full Text: PDF     DOI: 10.15640/ijat.v7n1a1