Derivatives and Risk Management

1

Introduction

LEARNING OBJECTIVES

After completing this chapter, you will be able to answer the following questions:

• What are derivatives and what are the main uses of derivatives?

• What are forwards, futures, options, and swaps?

• What are risks and how do they affect businesses?

• What are commodity price risks, interest rate risks, and currency risks?

• Why is it important to manage risks?

• What is meant by hedging?

• What are the approaches to risk management?

BOX 1.1 Caution While Using Derivatives

While dealing with derivatives, a number of points are to be kept in mind. First, a derivative contract is based on a zero-sum game, which means that for every person who makes money from derivatives, there must be one loser. Second, many derivative ...