Marqzho,
That makes me feel A LOT better! I'm scoring low 80's in WTB right now but that's only with material through Becker F6. I feel like I'm getting a lot better at pensions/deferred taxes that were killing me. I know I just have to keep up this work ethic until next month and I got it!
Spartans,
I don't know if you want an example or a conceptual answer, but derivatives are a type of hedging. One of the most common reasons to hedge is for foreign translation risk. That is the risk that exchange rates will change (not in your favor) during the period you hold monetary assets in another currency.
Say you bought stocks in British Pounds on Jan, 1 year 1. You hold the securities as AFS and sell them at December 31, Year 2. The two years that you held those securities exposes you to risk of translation loss when you convert those securities back into U.S. Dollars.
To hedge against that translation risk, you can purchase what are called “Forward Rate Contracts” which promise that you can translate your foreign monetary assets back into U.S. Dollars at a certain rate. However, they typically charge a portion of your funds after translation.
If your contracts states that the pounds to dollars rate is $.98 cents per pound and the spot rate at the date of conversion is $.90 center per pound, you are saving yourself $0.08/pound which can be huge with a lot of securities. However, you promised to pay them $0.05/per pound. Therefore you are still netting a $0.03/pound savings. Of course you can lose as well.
This is a type of derivative. Because by purchasing the contract you are paying for protection against an uncertain future event, you are essentially betting on an “imagined” event. That is a derivative. Betting on an uncertain event.
FAR- 81
REG- 81
BEC- Aug 22, 2016
AUD- TBD
.