Investment Training and Consulting Institute, Inc.

Understanding and Auditing Derivative Strategies

Dates: September 25-26, 2017

Location: San Diego/La Jolla, CA

Course Time*: 8:00 am – 4:30 pm

16 CPE

*Note – Registration begins at 7:30 am on the first day of class.

Whether you’re brand new to the derivatives market or need to brush up this highly complex and constantly evolving area, this class is for you!  With the Dodd-Frank regulatory overhaul on its way, our derivatives class has been updated to stay on pace with changes impacting the derivatives markets, regulatory and otherwise.

It seems every day the Wall Street Journal has yet another article highlighting how derivatives have been used in a multi-billion dollar scandal. While investing in derivatives can be risky business and make for great headlines, not utilizing derivatives in a portfolio to hedge risk is gambling on uncertainty. As auditors, we must ensure our companies are using derivatives in a manner that is consistent with Management’s intentions and in a properly controlled environment. If derivatives are used in an environment where internal controls are weak or non-existent, disaster can strike, and it can strike quickly. The changing regulatory environment adds additional risk and complication to this highly complicated area.

Join us to get up-to-speed on the new user categories, clearing requirements, capital requirements, new position limits and more. Examples cover derivative trading in all industries and information in this class will not only benefit auditors but will provide invaluable information to back office, accounting, compliance officers and risk managers.


  • Demystify derivative strategies including forwards, futures, options and swaps. Expose the “hidden” risks of using complicated strategies that could cost your company millions.
  • Understand the different risk profiles of exchange traded derivatives versus OTC strategies. Explore the new financial regulation and how OTC derivatives could be affected by this regulation. Understand the difference between “exchange traded” and “cleared on the exchange”.
  • Review user categories under Dodd Frank and the related clearing, capital, and position requirements.
  • Review the critical responsibilities of the front, middle and back offices and discuss leading practices and key internal controls which must be present.
  • Discuss derivative accounting rules and learn the three areas where external auditors find the most frequent material violations in accounting for derivatives.
  • Discuss the lessons learned from the most recent case studies.
  • Learn how to understand derivative strategies to determine whether “speculation” is being disguised as “hedging”. Know how to spot the red flags when they are present.
  • Learn new audit techniques through data analysis which can help you find anomalies in trading activity if they are present.
  • Discuss audit objectives and audit steps in each type of derivative product to get you started in program development.
  • Review regulatory hot spots in the derivatives markets – including recent market manipulation probes by the CFTC.


Understanding the Derivative Environment

  • The Importance of Auditing Derivatives
  • What’s Going Wrong? What’s Going Right?
  • Derivative Debacles of the Past
  • Hedging vs. Speculation
  • Introduction to Derivative Risk Management
  • Earnings Stability vs. Price Certainty

The Forward and Futures Contracts

  • Defining the Forward Contract
  • Why Forwards rather than Futures
  • Mechanics of a Forward Contract
  • Accounting for a Forward Contract
  • Defining the Futures Contract
  • Characteristics of Exchange-Traded Contracts
  • The Mechanics of Margin
  • Using Futures to Hedge Price Uncertainty
  • Basis Risk: Locational Bases, Product Basis
  • Audit Objectives when Reviewing Forward and Future Contracts

The Option Market

  • Fundamentals of Options
  • Option Terminology
  • Analyzing the Option Premium
  • Types of Options
  • Exchange-Traded
  • Caps and Floors
  • Collars
  • Strategic Use of Options
  • Barings Bank Case Study
  • Audit Objectives when reviewing Option Contracts

The Swap Market

  • SWAP Mechanics
  • SWAP and SWAPTION Terminology
  • Understanding SWAPS examples
  • Credit Derivatives – Default SWAPS
  • Audit Objectives when Reviewing SWAP Contracts

Controlling Derivative Activities

  • Management Risk
    • Segregation of Duties
    • Management’s Responsibilities
    • Internal Controls and Audit Considerations
  • Market Risk
    • VAR
    • The three methods of computing VAR
    • Using VAR to establish trading limits
    • Model Verification
    • Pro and Cons
    • Internal Controls and Audit Considerations
  • Counterparty Risk
    • Master Agreements
    • Credit Enhancements – Credit Metrics
    • Internal Controls and Audit Considerations
    • Legal Risk
    • Netting Enforceability
    • Foreign Counterparties
    • Internal Controls and Audit Considerations
  • Operational Risk
    • Most common operational problems in derivative settlements with counterparties
    • Confirmation issues to be concerned about
    • Internal Controls and Audit considerations

Derivative Accounting

  • Highlights of FAS 133
  • Documentation requirements
  • Hedge Effectiveness Testing
  • Long Haul vs. Short Cut Accounting
  • Matched Critical Terms
  • Disclosure Requirements

Regulatory Update

  • Dodd Frank User Categories
  • Clearing and Capital Requirements of Dodd-Frank
  • Risk Management Changes Resulting from Dodd-Frank
  • Market Manipulation Focus of the CFTC

Course Duration: 2 day(s)
CPE Hours Available: 16
Knowledge Level: Intermediate
Field of Study: Auditing, Accounting, Specialized Knowledge & Applications
Prerequisites: ​General Knowledge of Audit & Investments
Advance Preparation: None
Delivery Format: Group-Live