Derivatives and the Internal Auditor by PricewaterhouseCoopers, Risk Books

By PricewaterhouseCoopers, Risk Books

This is often an authoritative, step by step consultant throughout the practicalities of auditing derivatives. It comprises an advent to the detailed features of a few of the tools and terminology, and an updated overview of regulatory issues worldwide.

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Derivatives and the Internal Auditor

This is often an authoritative, step by step consultant throughout the practicalities of auditing derivatives. It comprises an creation to the specific features of some of the tools and terminology, and an updated evaluate of regulatory issues worldwide.

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Here is how that could happen. Suppose a trader buys an over-the-counter European call option on the S&P500 with an exercise price of $1,150. The option expires in 65 days. 25. 25. The value of the option is presumably determined in a competitive marketplace and quoted by a dealer willing to take the opposite side. The trader books the transaction and his firm proceeds to mark the position to market on a daily basis. In order to obtain a price for the option for this purpose, the trader is required to submit a volatility estimate each day.

As the 1990s draw to a close, derivatives are now commonly used by corporations, banks, governments, and many portfolio managers to assess the level of risk, allocate appropriate supporting capital, and fine-tune a portfolio - a convenient tool to make sure that the level of desired risk-taking equals the actual risk-taking. They have infiltrated the smaller investor retail market and they are now commonly used as part of executive compensation schemes. This wider usage means that more and more audit professionals are coming into regular contact with derivatives and need to understand - at the least - their basic principles.

It also explains why insurance companies and corporations, where large parts of the business have no value recognition or disclosure under current accounting and reporting rules, have lagged in their development of risk management practices. They will be motivated to change, however, with the introduction of SFAS 133 by the Financial Accounting Standards Board, which will require all entities to record their derivative transactions at fair market value on their balance sheet, and to record changes in market value on their income statement.

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