Managing Risks and Derivatives

The controversy surrounding derivatives illustrates that having a little knowledge can be a dangerous thing for bankers and their clients. But the newly published book, “Managing Risk with Derivatives,” shows that thorough knowledge and understanding of derivatives can be rewarding.

Despite the adverse publicity associated with derivatives, they can reduce risk for banks and companies.

This is the underlying assumption in the 206-page book, which features charts, graphs, a glossary and many examples based on real-life situations. The book, published by the American Bankers Association, is a valuable tool for bank management, corporate treasurers, asset/liability managers and commercial lenders and their business customers who want to understand why derivatives are a useful and necessary financial tool, why people who use them appropriately increase the value of their institutions and how to execute a transaction with a dealer.

“The key to understanding derivatives is understanding what they do and how they hedge interest rate exposure, ” says Townsend Walker, the book’s author. “When used appropriately, derivatives give banks and companies enormous additional flexibility in their funding and investing activities.”

Walker, a senior vice president at Bank Of America, has managed derivatives trading and marketing, as well as correspondent groups, and developed workshops in foreign exchange and managing interest rate risk for the bank.

Prior knowledge of derivatives is not needed to understand the book, just a familiarity with finance. Technical terms are not used until the concept is fully explained.

“Managing Risk with Derivatives” illustrates:

* how to tell if a company or bank is exercising the right amount of caution in using derivatives;

* how to measure interest rate exposure; and

* how to establish policy guidelines and execute a transaction with a dealer.

The book is available from the American Bankers Association, a trade and professional association serving the entire banking community, by calling (800) 338-0626. It is $69 for ABA members and $99 for non-members. There is a 10 percent discount on the purchase of five or more copies.