Corporate Finance For Dummies, 2nd Edition

Chapter 13

Pricing Probability from Derived Value

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. This chapter explains more.

Deriving Value

Derivatives are legal contracts that set the terms of a transaction that can be bought and sold as the current market price varies against the terms in the contract. Originally, derivatives were all about bringing price stability to products that can be quite volatile in their pricing over short periods of time. Prices change quite a lot over time, which adds a degree of uncertainty and risk ...