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Financial Engineering: The Evolution of a Profession by Cara M. Marshall, Tanya Beder

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Chapter 24

Musings About Hedging

Ira Kawaller

Kawaller & Company

This chapter is personal.

I've had the good fortune to be able to enjoy a career in finance for more than 25 years and counting. For almost all of that time, I've worked with derivative contracts of one form or another. My focus during the first half of my professional life was on exchange-traded derivatives. As the director of the New York office of the Chicago Mercantile Exchange (CME), I marketed the CME's financial contracts, including futures and options pertaining to interest rates, currencies, and equity markets. Since then, my scope has broadened to include over-the-counter derivatives as well. For the most part, however, I've stayed with pretty traditional tools: futures, forwards, options, and swaps—plain-vanilla derivatives and textbook applications.

At the end of 1998, the CME closed its New York office, and I started consulting. A niche had developed that turned out to work for me. Just about that time, the Financial Accounting Standards Board (FASB) had come out with new accounting rules for derivatives and hedging transactions. The rules were (and still are) complex and difficult to apply. The FASB appreciated this problem and recognized that questions were bound to come up. To assist in responding to these questions, the FASB established a Derivatives Implementation Group, which was tasked with advising the FASB on implementation questions being submitted by the public. I was invited to be a member ...

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