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Home » Finance Homework Help » Financial Risk Derivatives
Financial Risk Derivatives
The main objective of this particular aspect of financial management is to understand the reasons for hedging risk and to show options can be used the hedge risk. Derivatives explain forward and futures contracting and illustrate use of future and forward contracts for hedging risk. It also discusses the use of swaps to change the risk of interest rates and currencies.

A firm faces several kinds of risk. Its profitability fluctuates due to unanticipated changes in demand, selling price, costs, taxes, interest rates, technology, exchange rate and host of other factors. Managers may not be able to fully control these risks, but, to some degree, they can decide the risks that the firm should take. They adopt many strategies to reduce their firms’ risks. They keep several options open; they create operating flexibility that might bail them out in difficulties. Managers can reduce their risk exposure by entering into financial contracts. The term derivatives can simply be understood as those items that so not have their own independent value, rather they have derived value. Derivatives have a significant place in finance and risk management. A Derivative is a financial instrument whose pay-off is derived from some other asset which is called an underlying asset.

The value of the stock option depends on the value of the share. Options are more complicated derivatives. There are a large number of simple derivatives like futures or forward contracts or swaps. As we shall discuss later in this aspect, derivatives are tools to reduce a firm’s risk exposure. A firm can do away with unnecessary farts of risk exposure and even convert exposures into quite different forms by using derivatives. Hedging is the term used of reducing risk by using derivatives.

Some of its main topics are:


1. Derivatives and risk hedging
2. Forward contracts
3. Futures contracts
4. Risk management strategy
5. Spot and future prices of commodity futures
6. SWAPS


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