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Derivatives Demystified!

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By Emily Hollis, CFA, Partner, ALM First Financial Partners, LLC

Screen Shot 2013-06-12 at 11.27.47 AMIn June 2011, NCUA released its first Advanced Notice of Proposed Ruling (ANPR) for credit union derivative authority. In late January 2012, NCUA issued its second ANPR for derivative authority. On May 16, 2013, the NCUA released a notice of proposed ruling for derivative activity. NCUA points out in the supplementary information that 28 percent of banks with assets between $250 million and $1 billion and 57 percent with assets between $1 billion and $5 billion use derivatives to insure against interest rate risk.  This fact says it all: It is a normal practice for financial institutions.

Understanding the concept of hedging is not difficult. In fact, it is much easier than understanding some of the other products and strategies on CEOs’ plates today. It just takes a little focus and some groundwork to get it going. Simply put, hedging is a form of insurance. 

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