This lesson introduces the fundamental concepts of derivatives and their role in hedging financial risk. The CTP curriculum includes a dedicated section on “Derivative Instruments as Financial Risk Management Tools” .

6.1 Defining Derivatives

Derivatives are financial contracts whose value is derived from an underlying asset, index, or reference rate. The ACT curriculum and CTP both position derivatives as critical tools for managing financial risk .

6.2 Key Derivative Instruments

  • Forwards (FX/Interest Rate): OTC contracts to buy or sell an asset at a set price on a future date, used to lock in a rate .

  • Futures: Standardised, exchange-traded forward contracts .

  • Swaps: OTC contracts to exchange cash flows, often used to swap a fixed rate for a floating rate (interest rate swap) .

  • Options: Contracts giving the holder the right, but not the obligation, to buy (call) or sell (put) an asset at a specified price .

6.3 Hedging vs. Speculation

A critical distinction for treasury professionals is understanding the difference between these two activities :

  • Hedging: Using derivatives to reduce or eliminate an existing financial risk. This is the primary purpose of treasury operations.

  • Speculation: Using derivatives to take on risk in the hope of making a profit. This is not a core treasury function.

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