CFM13010 | Understanding corporate finance: derivatives: overview

Contents

This section of the Corporate Finance Manual explains the commercial background to the use of derivatives.

CFM13020 onwards explains what a derivative is, the concept of underlying assets, how derivative are settled and the sort of contracts and documentation they use.

CFM13110 onwards explains the main types of derivative (forwards, futures, swaps and options, and ‘exotics’).

CFM13270 onwards explains how derivatives are used to manage, or ‘hedge’, risk.

Note that the term ‘derivative contract’ is tax terminology and refers to contracts that are dealt with for the purposes of corporation tax under CTA09/PT7. The term ‘derivative’ takes its meaning from the world of finance and is be defined in accounting standards. The definitions under IFRS and UK GAAP, FRS102, and the superseded FRS26 are consistent.

The tax definition of ‘derivative contract’ and the accounting definition of ‘derivative’ do not coincide exactly. The tax term can have a broader scope in that contracts can be derivative contracts even where the initial investment in the contract is small; this would exclude such contracts from the accounting definition of a derivative. On the other hand, to be a derivative contract, certain conditions set out in CTA09/PT7 must be satisfied, for instance as regards the underlying subject matter, so not all derivatives will be derivative contracts.