Corporate Finance For Dummies

Chapter 13

Measuring Valuations of the Might-Be: Derivatives

In This Chapter

Getting an overview of the risks and benefits of options

Understanding the difference between forwards and futures

Switching things up with swaps

For a financial tool that was originally designed to reduce the amount of risk associated with many of the most common corporate transactions, derivatives have become a veritable minefield for many companies. Not only can there be a strong attraction for the use of derivatives as a way to generate income despite the high level of risk this can create, but derivatives are also frequently not properly represented in corporate financial statements. Still, despite the common pitfalls, derivatives really are quite simple to understand and use.

In this chapter, I focus on several of the most common types of derivatives: options, forwards, futures, and swaps. I describe how to use these four types of derivative to limit risk and generate revenues, and I briefly explain how to measure the value of each one. Note that more types of derivatives are out there and they all have multiple variations. I don’t have the space to cover them all here, so I’ve highlighted just the ...