Derivatives for Risk Management and Speculation
Derivatives for risk management and speculation
Company financial management employs derivatives with multi-purposes; it includes hedging purposes, independent access to derivatives and the strength of internal and external corporate governance (Howton& Perfect, 1998). In some cases, the investment has been considered as speculation; it has been used by company to add value on asset especially this tendency is widely found in oil and gas field. Speculation activity is similar with equity transaction based on forecast the price change due to the high fluctuation of oil and gas price.
The derivatives transaction is companying with high risk although there are great opportunity for adding value, especially the transaction between a regulated and transparent derivatives markets to poor regulated derivatives market, in this case, it requires establishing on time risk management system is essential for managing risk. In general, the derivatives transaction will bring in market risk, credit risk, operational risk, liquidity risk and law risk. The risk management on oil and gas sector of business is characteristic at the complexity and wide coverage systematic project, reinforce on on-time risk monitoring system is account for the improvement of management level.
BP annual report (2010) understand consequences of derivatives usage normally will bring in risk to variety of firm stakeholders, BP attaches great importance on placing derivatives embedded within other financial instruments as well as forward oversea contract. Forward contracts placed to buy or sell equity investments, including investments in associates and joint ventures, are also accounted for as derivative financial instruments. All derivatives are initially set under fair value on the date, when a derivative contract is placed and are subsequently to be premeasured upon fair value. Derivatives relating to equity instruments are carried out in manner to follow up the fair value at the new data.
Gains and losses due to contract implementation time changes are taken as effective hedging instruments will be indicated in the income statement. In this way, BP views that it can bring derivatives in risk management framework.
6. Application of corporate finance
There are usually high barrier to implement company policy from home company to Host Company (through merger and acquisition The major difficult in application of corporate finance lies in the different accounting system influenced by different national culture background. Foreign Investment Company is account for acquiring the high return through the merge and acquisition, the key restructuring process on acquired party is with one important task to influence the corporate finance. However, the coordination and standardization on international accounting is always