Derivative transactions are increasing...

According to an article of "The Nikkei Financial Daily," derivative transactions are increasing in American banks. They say that Hedge funds have intended to use them for risk hedges, and interest, foreign exchange demands have increased. (Here is the article. (in Japanese) ) Gross transaction volume has increased by about 30% compared to the amount of last year.

As we know, derivative instrument is used for 2 methods. One is purely investment, and the other is used for hedge accounting. The latter usage, for example, is useful in fixing company's profit, if the company trades with foregin currency. With some commission expense to financial institutions, the derivative instruments provide such a company with stable profit.

Oh, time is up!! I have to return to study now. At last, we review 3 key characteristics of derivative instruments due to SFAS 133 in USGAAP, just in case.

1. underlyings and payment provision.
The instrument has 1 or more underlyings and an identified payment provision.

2. initial investment
The instrument requires no initial investment or an initial investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.

3. net settlement
The terms of its contract require or permit net settlement, or provide for the delivery of an asset that puts the recipient in a position not substantially different from net settlement.