CHAPTER 33
Derivatives for Managing Financial Risk
LEARNING OBJECTIVES
- Explain the reasons for hedging.
- Discuss how options can be used to hedge risk.
- Explain forwards’ and futures’ contracting.
- Illustrate use of future and forward contracts for hedging risk.
- Discuss the use of swaps to change the risk of interest rates and currencies.
INTRODUCTION
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 ...
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