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    Benefits & Pitfalls of Derivatives

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    Why do companies use derivatives? How can these be beneficial to a company? How can they hurt a company?


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    Why companies use derivatives how can these be beneficial to a company?

    Companies use derivatives as investments or hedges, used to reduce the risk of adverse price movements in an asset. The hedge typically consists of taking an offsetting position in a related security, with futures contract the most commonly used by companies in regard to derivatives. There are three types of derivatives that can beneficial to a company including derivatives for hedging foreign-currency risk, or foreign-exchange risk, hedging ...

    Solution Summary

    Almost 400 words explain the advantages and disadvantages to a company using derivatives.