Derivatives
Lifecycle
Derivatives consist of Option (Interest swaps, Forex/Currency), Forwards/Futures and CDS. Derivatives must be fair valued at every reporting date.
Often derivatives are used as hedging instruments:
i) Fair Value Hedge or ii) Cash Flow Hedges. In both hedge accounting ways, derivatives must be valued at fair value. We observe complexities in following hedge scenarios: i) Foreign Currency Amount is not hedged, but the interest rate is hedged (i.e. floating to fixed); ii) Options embedded in agreements are dependent on Unlisted company and European in nature, etc.
Isn’t working with a derivative is similar to playing a game of chess? An instrument with multiple alternatives!
Embedded Derivatives
- Optionally Convertible Debentures
- Compulsory Convertible Preference Shares with Put Options
- Shareholders Agreements with Options to incoming investors
- Foreign Currency Lease Contracts in Third Currency
Hedging Derivatives
- Interest Rate Swaps
- Principal & Interest Swaps
- Cross Currency Swaps
- Forward Currency Options
- Forwards
- Contracts under ISDA Guidelines
Have more questions?
Data related to Alternative Reference Rate
IBOR Cessation by December 2021
Hedging of Part Contract (On Foreign Currency Loan, Interest Rate risk is hedged but foreign currency risk is not hedged)
Valuation Complexities
Basis Risk, Tail Risk, and Model Risk
Verification of Contracts within ISDA Protocols
Uncertainty of pricing inputs
Valuation Complexities
High growth potential
No revenues and operating losses
Uncertain call future potential
Primary asset = IP
Expected ESOP
Negative bottom line
Private entity (non-comparable listed entities)
How can we help you?
Use of relevant zero curves
Expertise in ASC 825, IFRS 9, IFRS 13, & IAS 32
Application of Monte Carlo Simulations for exotic instruments
Black & Scholes Method for European Options
Statistically driven valuations for American Options
Experience of valuing derivatives more than worth $2600 Million (INR 20,000 Crore)
How can we help you?
Use of relevant zero curves
Application of Monte Carlo Simulations for exotic instruments
Statistically driven valuations for American Options
Expertise in ASC 825, IFRS 9, IFRS 13 & IAS 32
Black & Scholes Method for European Options