When you engage in transactions on the financial markets, you are exposed to certain risks, in particular in connection with currency fluctuations.
To protect yourself against these risks, there are various hedging instruments available today. Among them are, in particular, derivatives.
Of various types, they can be used by companies to avoid major financial losses. In order to understand how derivatives work and how they are valued, we will go back over these different points in detail.
To ensure that your activity on the financial markets is as beneficial as possible, it is essential to adopt the best possible strategy and use the right hedging instruments.
In order to help you in this respect, DeftHedge has developed a SaaS software solution to support all professionals in their behaviour on the financial markets.
With our tool, you will be able to adopt and perfect your hedging strategy and make the most of derivatives. To take advantage of all the benefits of DeftHedge for your daily business, discover here all the functionalities of our financial risk management tool.
What is the valuation of hedging derivatives ?
Comparable to an insurance policy, a derivative therefore has a specific value which depends on several criteria in order to be able to evaluate it.
Indeed, the price of a derivative will depend on the risks insured. This implies that the greater the risks to be covered, the higher the option will be.
In order to value a hedging derivative, several elements must therefore be taken into account in the calculation:
The underlying: nature, price, volatility of the value
Term to maturity of the contract
In order to ensure that the price of the financial hedging derivative is as fair as possible, an accurate valuation must therefore be carried out taking into account all these elements.
Today, two valuation methods can be distinguished on the market: the Cox & Rubinstein method and the method based on the Black & Scholes formula.
What is IFRS ?
Since 2005, companies listed on a European market have had to comply with the rules of an accounting framework: the International Financial Reporting Standards (IFRS).
This framework consists of a set of standards defining a precise framework for accounting methods.
Bringing listed companies into compliance with this accounting framework improves comparability between the financial statements of companies in the same sector.
This is particularly beneficial for simplifying and optimising investment choices later on.
What is French GAAP ?
While IFRS applies to all companies listed on European markets, each country has its own set of accounting standards, which are more or less different from the IFRS standards.
In France, “French GAAP” (Generally Accepted Accounting Principles), also known as PCG (Plan Comptable Général), is applied.
Issued by the Autorité des Normes Comptables (ANC), this text defines the various accounting rules that companies domiciled in France must comply with: financial accounts, balance sheets, income statements, reports, etc.
Like IFRS, the PCG is intended to facilitate the control and comparison of accounting between companies.
In order to be best adapted to globalisation, French companies are aligned with these rules as well as with international standards.