Derivatives, Who Knows?
Derivatives are leveraged assets and liabilities with risk which tend not to be accounted for on the balance sheet, and are usually mentioned in financial statements as footnotes, if they are mentioned at all.
How do it know? It don't. Auditors usually have to attest to the soundness of a companies financial's. Many valuation methods for derivatives are used, such as Value at Risk. VAR is a measurement utilizing statistical techniques that evolved from physics and engineering. These valuation methods are also used to "stress" test the financial instrument for market simulation purposes.
How do we know? We dont. Unfortunately, the complexities involved with the valuation of derivatives are myriad. Many of the methodologies used were developed in other fields of endeavor and subsequently bastardized for the financial world. This fact dictates that the performance of derivatives, in evolving market conditions and different financial circumstances, can be very unpredictable.
How do it know? It don't. Auditors usually have to attest to the soundness of a companies financial's. Many valuation methods for derivatives are used, such as Value at Risk. VAR is a measurement utilizing statistical techniques that evolved from physics and engineering. These valuation methods are also used to "stress" test the financial instrument for market simulation purposes.
How do we know? We dont. Unfortunately, the complexities involved with the valuation of derivatives are myriad. Many of the methodologies used were developed in other fields of endeavor and subsequently bastardized for the financial world. This fact dictates that the performance of derivatives, in evolving market conditions and different financial circumstances, can be very unpredictable.
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